Taxes: Everyone’s favorite thing to worry about just once per year. Taxes are more of a worry for some people but are exciting for others who get a refund from income taxes. In reality, we pay taxes in many forms almost every day and hardly realize it.
The tax code in the US (or any modern economy) is complicated, attempting to cover many types of citizens in many situations. There are different types of taxes in many categories. Most people pay them because it’s the law, not out of the goodness of our hearts—so you want to consult with professionals on tax law and financial planning to keep as much of your money as possible.
What Are the Different Types of Taxes You Pay?
It’s smart to understand the basics of where your tax dollars are going. Here are some of the different types of taxes common in the US:
- Income Tax: Most states tax wages, interest, and business income. Income tax often charges increasingly higher percentages as income increases, but earners can decrease their taxes with tax deductions, credits, and allowances.
- Payroll Tax: Employers take payroll taxes out of employees’ checks to pay for Social Security and Medicare.
- Capital Gains Tax: These apply to earnings from selling an asset, such as a bond or real estate property.
- Estate Tax: Taken from property transfers after someone’s death—often wealthy individuals. The tax only applies if the estate is worth more than $11.7 million, preventing great wealth from being transferred tax-free. Some US states also charge an additional inheritance tax on wealth transfers after death.
- Gift Tax: Levied on gifts of funds or valuables while an individual is alive. Up to $15,000 is allowed before it is taxed, and this amount can be gifted every year.
- Real Estate Property Tax: Taxes paid based on the value of a type of real estate property. The tax may be paid annually or split into monthly payments. Real estate taxes are on a current valuation of the property and thus can change. Real estate owned by businesses, such as property for a factory, may also be taxed by your state.
- Other Property Tax: You may also pay regional taxes on property such as vehicles, including cars, RVs, airplanes, and boats.
- Sales Tax: This is a percentage of the price of each retail product purchased. States and cities often levy this to increase their funds. The percentage varies based on the type of product and can even be zero for some.
- Excise Tax: A tax based on the number of products or units instead of a percentage of their price, such as a flat charge on every gallon of gasoline that a business purchases to sell. Excise taxes are used to offset the cost of products that are considered harmful, such as tobacco, alcohol, and fuel. The taxes are technically paid by the seller, who then adds them to the sale price.
- Luxury Tax: These are imposed on expensive items, such as luxury vehicles.
- User Fees: This is considered a tax but it is often experienced as simply a fee or charge for access to a location or service. Examples include the fee to enter the Statue of Liberty, to tour a national park, to drive on a toll road, or to use a public parking garage.
Many of these taxes and fees help pay for the benefits of the government that we enjoy, such as Social Security, well-maintained roads, national defense, parks, and much more.
Taxable Income vs. Non-Taxable Income
Not every type of monetary income is taxed. Many are, but it’s vital for successful financial planning that you know the difference. Common types of taxable income include both earned and unearned income, such as:
- Salary, wages, and tips earned as an employee
- Self-employment income (after deductions)
- Disability payments before retirement
- Jury duty pay
- Capital gains
- License or royalty payments
- Employment severance pay
- Some canceled debts
- Unemployment pay
Some of the income types that are usually not taxed include:
- Child support or foster care payments
- Workers’ compensation
- Federal tax refunds
- Canceled debts given as gifts
- A gift or inheritance
- Disability benefits
- Some veterans payments
- Social security payments
- Life insurance payments
- Capital gains on the sale of your own house
- Retirement funds transferred between accounts
It’s possible to be charged taxes on some of these types of income, which is a reason it’s important to talk to a qualified tax planner.
Learn More About Taxes with Tax Help MD
Think of all the types of taxes discussed above. Some taxes can be levied on certain types of income at one time but not another. To be sure that you’re paying the correct taxes to avoid penalties and overpaying, contact an expert. Your friends at Tax Help MD can help you understand your taxes, file them correctly, or negotiate a tax debt. Schedule an appointment now.