As the old saying goes – nothing in life is certain except death and taxes. But taxes, as it turns out, can be pretty confusing.
In general, taxes are defined as mandatory charges levied on individuals or organizations by the government. They can be local, regional, or national and are often used to finance government activities and services.
Most taxes can be divided up into one of three categories: taxes levied on your income or earnings, taxes on the items you buy, and taxes on the things you own and will fall into one of four types: consumption, progressive, regressive, or proportional.
Read on for more information about individual taxes.
Types of Taxes
- Consumption Tax: Consumption taxes are taxes on the money that you spend, not the money you earn. Consumption taxes including things like sales tax or excise tax.
- Progressive Tax: Progressive taxes are taxes that have a higher rate for individuals with more money. One example of a progressive tax is the US Federal Income Tax.
- Regressive Tax: A regressive tax is one that is not progressive. This could mean that the tax has a lower rate for the wealthy or is a flat tax.
- Proportional Tax: A proportional tax is a flat tax, meaning that all taxpayers pay the same “proportion.” Proportional taxes are more common at the state level of taxes.
Taxes by Category
Taxes on Earnings
- Individual Income Tax: The individual (or personal) income tax is levied on individual earnings or income. This can include salaries, wages, investments, etc. In the US, income tax rates range from 10% to 37% based on income thresholds.
- Corporate Income Tax: The corporate income tax (CIT) is an income tax applied to business profits (minus costs). Corporate income taxes have been known to drive up prices and fees and as such, the US has lowered the federal corporate income tax rate to 21%.
- Payroll Tax: Payroll taxes are levied on the wages or salaries of employees, specifically to finance social insurance programs. In the US this means a 12.4% tax to fund social security and 2.9% to fund Medicare. Typically, half of payroll taxes are paid by the employer and half by the employee.
- Capital Gains Tax: Capital gains taxes are levied on the “profit” that one earns on the sale or increase in value of an owned asset like investments, homes, or personal property. Capital gains tax rate is 0%, 15%, or 20% depending on the amount of your taxable income (the higher your income, the higher the tax rate).
Taxes on Purchases
- Sales Tax: Sales taxes are consumption taxes levied on the sales of goods and services – even if you don’t have income.. Most US states collect sales taxes, though rates due vary as does which goods are susceptible to sales taxes (i.e. some states do not tax food, others tax food at a lower rate, etc.).
- Gross Receipts Tax (GRT): GRTs are taxes applied to the gross sales of a company, regardless of profit and without deductions. GRTs are unique in that they are applied at every stage of production.
- Value-Added Tax (VAT): VATs are consumption taxes assessed on the value of a good or service, at each stage of production. Businesses pay the VAT along the production chain, with previously paid VAT being deducted, and the final consumer pays VAT at final sale.
- Excise Tax: Excise taxes are levied on specific goods or activities, such as cigarettes, alcohol, soda, etc. In some cases, excise taxes are used to offset the harmful side effects that are not included in the cost of an item (i.e. cigarettes). Excise taxes are also unique in that they are based on the quantity of an item rather than its value.
Taxes on Belongings
- Property Tax: Property taxes are applied to things like land or buildings and are an important source of revenue for governments within the US, accounting for 30% of state and local tax collections.
- Tangible Personal Property Tax (TPP): TPP taxes, unlike property taxes, apply to properties that can be moved. This can include things like furniture, inventory, automobiles, machinery, etc.
- Estate and Inheritance Tax: These taxes are imposed on the value of a person’s property upon their death. Estate taxes are paid by the estate itself, before property is distributed while inheritance taxes are paid by the individual who inherits. Starting January 1, 2024, the federal lifetime gift and estate tax exemption amount increased to $13.61 million per person. This increased exemption amount means that individuals can transfer up to $13.61 million tax-free during their lives or at death, and married couples can transfer up to $27.22 million.
- Gift Tax: The gift tax is a tax applied to any gift over a certain value ($18,000 in 2024). However, there are a number of exclusions for the gift tax:
- Annual exclusion of up to $18,000 a year per recipient
- Using lifetime gift tax exemption
- Making medical or educational payments on behalf of a loved one
While the existence of taxes may be predictable, the ins and outs of which taxes matter to you can definitely be a more complicated topic. Make sure to communicate with your financial planner and your tax advisor when planning for taxes and making financial decisions.