7 Different Types of Taxes That You Pay

7 Different Types of Taxes That You Pay

In the U.S., taxes are collected by the federal, state, and local governments. By the law, every working individual is required to file tax returns before a particular date, depending on the type of tax. This Buzzle article enlists the 7 different types of taxes you pay in the U.S.
Astonishing Facts!
  • The federal tax code of the US amounts to almost 6000 pages - and contains more than three million words.
  • In 2010, the tax collection by the US government contributed to almost 25% of the GDP.
Taxation in the U.S. can be rather complicated. The purpose of levying taxes is to obtain revenue to keep the government running and provide public services. Different types of taxes are imposed on working individuals to achieve the same. There are certain tax deductions that can be reduce taxable income, like mortgages, charity, medical bills, etc.

There is no exemption from taxes however. After all, taxation plays an important role in the financial decision-making of a nation. Taxes are very widely classified. The paragraphs below provide some of the important tax types and their descriptions.

An Introduction to the Tax Structure
  • As mentioned earlier, in the U.S., taxes are collected by the federal and state governments.
  • There are two principal types of taxes―direct and indirect.
  • In simple terms, direct taxes are paid directly to the government or any authorized entity, while indirect taxes are collected via a series of taxpayers―mostly by means of increase in the prices of goods.
  • From an economic perspective, direct taxes are levied on and collected directly from a specific group of people.
  • Indirect taxes are collected from an organization other than the people actually responsible for the taxes.
  • Examples of direct taxes include income tax, wealth tax, etc. Examples of indirect tax include excise duty, sales tax, service tax, etc.

Main Types of Taxes

Income Tax
  • Income tax is levied on every working individual, and is collected by the Internal Revenue Service (IRS).
  • The states and local governments have their own income taxes as well.
  • The tax is levied on your personal income, interest income, and revenue from business.
  • Income tax brackets are generally progressive―the more you earn, the more taxes you pay.
  • Federal tax rates are higher than the state tax rates.
  • You can reduce your taxable income by means of certain allowances and deductions.
  • Remember that not all states have imposed a state tax. A federal income tax is mandatory though.

Property Tax
  • This is imposed by most local governments, since it is used to finance local services.
  • The tax is levied on real estate (mostly) and may apply to their property too.
  • This tax is deductible, and many American citizens may qualify for a interest deduction on mortgage. However, legally, the tax is deductible only if the real estate property is used for public welfare.
  • Since the tax is imposed on realty, it always depends on the market value of the property. The annual rates may vary between 0.9% to 1.2% of the property's current value.
  • The total tax amount collected is used to fund public services, such as schools, sanitation, security, etc.
  • The amount is paid to the local government or the county, based on the state guidelines.

Payroll Tax
  • The federal as well as state governments make it compulsory to pay payroll taxes.
  • It is a tax that the employer pays on behalf of the employee, i.e., the amount is deducted from his paycheck.
  • It is authorized by the Federal Insurance Contribution Act (FICA), and hence, is also called FICA tax.
  • There are two types of payroll taxes in US―Social Security tax and Medicare. Every employed individual in the U.S. is supposed to have a Social Security number.
  • Medicare and Social Security are federal run programs that provide benefits, generally for American citizens. Payroll taxes are used to finance these programs. The tax amounts to 7.65% of the income, of which 6.2% is for Social Security, and 1.45% is for Medicare.

Sales Tax
  • It is a type of indirect tax and is imposed on purchased goods and services.
  • The amount varies as per the price of the goods as well as the set rules and regulations of the state. Mostly, it is a percentage of the paid price.
  • It is levied on most of the purchased products, except food items. Also, some states/counties/cities charge a nominal amount on the product price, while others may charge a hefty amount. The percentage varies between 0 to 16%.
  • The amount is collected by the merchants at the time of sale and deposited with the state authority.
  • The types of sales tax include vendor tax (it is paid by the person doing business, and depends on the amount of goods sold), consumer tax (it is paid by the buyer at retail outlets and then sent to the state), and a combination tax.
  • This tax is considered regressive, since families with lesser annual income end up paying a major part of their salary for sales tax.

Excise Tax
  • Also called excise duty, it is similar to sales tax, except that it is levied on particular goods.
  • Also, it depends on the number of goods sold, not the amount.
  • The Federal government may impose a certain percentage of tax on every liter of oil, irrespective of the price per liter.
  • An excise tax may be charged on items, like beer, cigarettes, gas, etc.
  • States may charge an additional tax on these goods as well.
  • This tax is also called 'sin tax', since they are mostly imposed on such goods that are harmful to health. The purpose of excise tax is to make an effort to minimize the purchase of unhealthy items. It is mostly combined with sales tax.

Estate Tax
  • It is also called inheritance tax. It is levied by the Federal government and some of the state governments too.
  • The property you leave behind after your death is called estate. If you have more estate than required, the estate tax is to be paid on the inheritance of the property by your heirs.
  • That is to say, if you have a lot of property―including business revenue, security, cash, insurance, etc., and you distribute the property among your kith and kin, they will have to pay heavy estate tax on the same.
  • The federal government charges a maximum of 40% of the property for estate tax, while the states use comparatively lower rates. In some states, the amount paid depends on the relation between the deceased and the taxpayer.

Gift Tax
  • It is similar to the estate tax, but is levied on a large amount of transferred wealth. The wealth here may include shares, donations, cars, etc.
  • All gifts above USD 14,000 are taxable. The tax collected is 40% of the gift value.
  • The federal government charges a much lower amount for gifts as compared to estates.
  • If you plan to leave a huge number of assets for your heirs, it is advisable to seek advice from a tax professional and organize the assets.

Miscellaneous Taxes Paid

Capital Gains Tax: It is paid on the sale of stocks and bonds. You may also be subject to a capital gains tax on the sale of real estate.

Hotel Tax: It is the amount that hotels charge above the regular room rate.

Use Tax: It is paid for the different services that you use, like toll, licenses, cell phone, air travel, rental cars, lease, etc.

Luxury Tax: It is imposed on expensive items like jewelry or automobiles.

Fuel Tax: It is a type of user tax imposed on use of fuel―diesel, oil, gasoline, etc. The money is used for the maintenance of roads and highways.

Corporate Income Tax: It is levied by the states on huge corporations. The amounts vary as per the state.

Unemployment Tax: It is paid to unemployment agencies to help people find jobs. It is levied by the federal government.

Foreign Tax: It is the income tax imposed by the government of the foreign country. You have to pay a percentage of whatever income is earned by you in that country.

Failure to pay taxes on time may lead to severe repercussions. As a responsible citizen, it is essential to pay taxes on time. You may seek advice from a tax professional if you are confused about which taxes you have to pay.