Types of Taxes – Income, Property, Goods, Services, Federal, State (2023)

U.S. Supreme Court Justice Oliver Wendell Holmes once said, “Taxes are the price we pay for a civilized society.” One can argue about the extent and quality of the civilization that we receive for our tax dollars, but it can’t be denied that we do pay a lot for it.

In fact, when every tax is tallied – federal, state and local income tax (corporate and individual); property tax; Social Security tax; sales tax; excise tax; and others – Americans spend 29.2 percent of our income in taxes each year.

There are many different kinds of taxes, most of which fall into a few basic categories: taxes on income, taxes on property, and taxes on goods and services.

(Video) Taxes: Crash Course Economics #31

Taxes on Income

The federal government, 41 states and many local municipalities levyincome taxeson personal and business revenue and interest income. In most cases,income tax bracketsare progressive, meaning that the higher the income, the higher the rate of taxation. Federal rates for the 2021 tax year range from 10 to 37%. State and city rates are generally much lower. In addition, most systems allow individuals to reduce their tax bill with variouscredits, deductionsand allowances. Businesses pay taxes on their net income.

In addition to federal income taxes, the U.S. government also mandates that employers subtract payroll taxes from their workers’ paychecks each pay period, and then match the sums deducted. These payments are called FICA taxes because they are authorized by the Federal Insurance Contribution Act. Total FICA taxes on individual workers are 7.65 percent of income; 6.2 percent goes to fund the nation’s Social Security system, while 1.45 percent goes to Medicare. Self-employed individuals are liable for the entire 15.3 percent, although one half of that amount can be taken as an above-the-line business deduction on a person’s income tax return.

Capital gains taxesare those paid on any profits made from the sale of an asset and are usually applied to home sales, stock and bond transactions. The capital gains tax rate for 2021 is 0%, 15% or 20%. Your rate depends on the amount of your taxable income. The higher your income, the higher your rate. Profits made from thesale of real estateare also subject to a capital gains tax. Single homeowners may exclude up to $250,000 of capital gain on the sale of a home, as long as the home was a principal residence for at least two of the five years before the sale; married couples filing jointly can exclude up to $500,000.

Estate taxescan be considerable, but less than one-tenth of 1 percent of taxpayers have to pay them, which means 99.9% of us don’t have to worry about this. The estate tax exempts the first $11.7 million for an individual and $23.4 million for a married couple. Estate taxes are imposed on the transfer of property upon the death of the owner. They were created to prevent the perpetuation of tax-free wealth within the country’s most affluent families. The maximum top estate tax rate is 40%. Many states also impose their own estate tax, sometimes known as aninheritance tax. Opponents of these types of taxes believe that they are an unfair confiscation of wealth passed on to an heir and call them “death taxes.” A tax related to the estate tax, and assessed in a similar manner, is thegift tax, levied on a transfer of wealth during a person’s lifetime. The first $15,000 of a gift is excluded from the tax.

(Video) Ch#1 Lecture (Federal Taxation: Comprehensive): Intro to Individual Income Tax

Learn more about income tax.

Taxes on Property

Property tax, sometimes known as an ad valorem tax, is imposed on the value of real estate or other personal property. Property taxes are usually imposed by local governments and charged on a recurring basis. For example, homeowners will generally pay their real estate taxes either once a year or as a monthly fee as part of their mortgage payments.

Real estate taxes are often subject to fluctuation based upon a jurisdiction’s assessment of the worth of a property based on its condition, location and market value, and/or changes to the amounts apportioned to various recipients of the tax. For example, if residents of a community have voted to increase the millage rate (the amount per $1,000 that is used to calculate taxes) for a school system, homeowners could see an increase in the tax levied on their properties. Conversely, if property values have fallen due to adverse economic circumstances, home taxes may decrease.

Other items that may be subject to a property tax are automobiles, boats, recreational vehicles and airplanes. Some states also tax other types of business property such as factories, wharves, etc.

(Video) The Basics of Rental Property Taxation

Taxes on Goods and Services

Thesales taxis most often used as a method for states and local governments to raise revenue. Purchases made at the retail level are assessed a percentage of the sales price of a particular item. Rates vary widely between jurisdictions with 45 state collecting sales tax. Southern states like Tennessee (9.55%), Louisiana (9.52), Arkansas (9.51) and Alabama (9.22) have the top combine state and average local sales tax rate. Washington State also is in that group at 9.23%.

Local sales tax, typically administered by a city or county, are collected in 38 states. Surprisingly, the local sales tax in some places is higher than the state tax rate. For example, the average local sales tax rate in Alabama is 5.22% while the state sales tax is 4.0% for a combined total of 9.22%.

Believe it or not, the top combined city and state sales taxes is 11.5% that’s paid in Gould, Ark. Chicago, Long Beach (CA) and Glendale (CA) are all a distant second at 10.25%. Los Angeles (9.5%) and New York City (8.875%) are far behind.

It’s worth noting that taxes also vary on the type of item bought. For example, a pair of shoes may be taxed at one rate, restaurant food at another, while some items, like staple commodities bought at a grocery store, may not be taxed at all. Also, the same shoes may be taxed at a different rate if sold in a different state or county.

(Video) Corporate tax in 5 1/2 minutes

Some believe that sales taxes are the most equitable form of taxation, since they are essentially voluntary and they extract more money from those who consume more. Others believe that they are the most regressive form of taxation, since poorer people wind up paying a larger portion of their income in sales taxes than wealthier individuals do.

Excise taxes are based on the quantity of an item and not on its value. For example, the federal government imposes an excise tax of 18.4 cents on every gallon of gas purchased, regardless of the price charged by the seller. States often add an additional excise tax on each gallon of fuel.

User fees are taxes that are assessed on a wide variety of services, including airline tickets, rental cars, toll roads, utilities, hotel rooms, licenses, financial transactions and many others. Depending upon where someone lives, a cellphone, for example, may have as many as six separate user taxes, running up the monthly bill by as much as 20 percent.

So-calledsin taxesare imposed on items like cigarettes and alcohol.For example, the cigarette tax in Connecticut and New York is $4.35 per pack, highest in the nation. In Georgia, the same tax is 37 cents a pack.

(Video) States with no income tax | How they Generate Tax Revenue 2021 Update

Luxury taxesare imposed on certain items, such as expensive cars or jewelry. For example

FAQs

What type of tax is the income tax? ›

The term “income tax” refers to a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations. Income taxes are a source of revenue for governments.

What are 3 types of taxes? ›

progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.

How many types of taxes are there? ›

When it comes to taxes, there are two types of taxes in India - Direct and Indirect tax. The direct tax includes income tax, gift tax, capital gain tax, etc while indirect tax includes value-added tax, service tax, Good and Service taxm, customs duty, etc.

What are the main types of taxes? ›

Types of Taxes – Income, Property, Goods, Services, Federal, State.

What are the 7 types of taxes? ›

Here are seven ways Americans pay taxes.
  • Income taxes. Income taxes can be charged at the federal, state and local levels. ...
  • Sales taxes. Sales taxes are taxes on goods and services purchased. ...
  • Excise taxes. ...
  • Payroll taxes. ...
  • Property taxes. ...
  • Estate taxes. ...
  • Gift taxes.
4 Jan 2014

What is tax and its types? ›

Types of Taxes
Taxes
Direct TaxesIndirect TaxesOther Taxes
Income TaxSales TaxProperty Tax
Wealth TaxGoods & Services Tax (GST)Professional Tax
Gift TaxValue Added Tax (VAT)Entertainment Tax
3 more rows

What is an example of income tax? ›

For example, somebody earning $30,000 per year may pay 25% of their income compared to those earning $300,000+, who pay 35%. The Financial Times' glossary of terms has the following definition of income tax: “This is a tax on the earned and unearned income of individuals and trusts.

What are the 2 types of tax? ›

Typically, the tax structure includes Direct tax and Indirect taxes. Direct taxes: These are taxes that are levied on an individual and are directly payable to the government.

What are 3 things taxes are used for? ›

The three biggest categories of expenditures are: Major health programs, such as Medicare and Medicaid. Social security. Defense and security.

What are the 3 characteristics of a tax? ›

Characteristics of an Effective Tax System
  • Fairness, or equity, means that everybody should pay a fair share of taxes. ...
  • Adequacy means that taxes must provide enough revenue to meet the basic needs of society. ...
  • Simplicity means that taxpayers can avoid a maze of taxes, forms and filing requirements.

What are the 3 most common taxes? ›

There are various lesser-known types of tax, such as tax when you travel, or tax for gambling winnings, but in this post, we'll be focusing on three of the most common types of tax: income tax, consumption tax, and property tax.

What is a tax name? ›

Tax Name. A unique name for your tax. For example, CA Sales, 15% VAT, or Federal Withholding.

What are the 5 heads of income? ›

Heads of Income Tax
  • Income from salary.
  • Income from house property.
  • Income from profits and gain of business or profession.
  • Income from capital gains.
  • Income from other sources.

What is the most common type of tax? ›

Taxes on property

The most common type of ad valorem tax in the U.S. is property tax for your home and other real estate. States may also have personal property taxes that apply to valuable possessions like a car or boat.

What are the six categories of taxes? ›

  • Personal income tax.
  • Corporate income tax.
  • Communal business tax. Net wealth tax. Property tax.
11 Jun 2018

What is a tax Short answer? ›

Tax is an amount of money that you have to pay to the government so that it can pay for public services such as roads and schools. The government created a new tax on the retail sale of certain goods and services. A retail sales tax is levied on the purchase of a commodity.

What means income tax? ›

income tax, levy imposed on individuals (or family units) and corporations. Individual income tax is computed on the basis of income received. It is usually classified as a direct tax because the burden is presumably on the individuals who pay it.

What are 10 types of taxable income? ›

What is taxable income?
  • wages, salaries, tips, bonuses, vacation pay, severance pay, commissions.
  • interest and dividends.
  • certain types of disability payments.
  • unemployment compensation.
  • jury pay and election worker pay.
  • strike and lockout benefits.
  • bank “gifts” for opening or adding to accounts if more than “nominal” value.

Who started income tax? ›

1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.

Who is person in income tax? ›

An Individual ( Salaried Person, Person who is a sole proprietor, Teacher etc.)

What are 5 things federal taxes pay for? ›

The majority of tax dollars helps to fund defense, Social Security, Medicare, health programs and social safety net programs such as food stamps and disability payments, along with paying off interest on the national debt.

What are the four most used taxes? ›

The four most used tax bases are individual income, corporate income, sales, and property.

What are taxes used for list? ›

2. Mandatory Spending
  • Social Security. Social Security was created to provide income for retired workers over the age of 65 and accounts for a large chunk of mandatory spending. ...
  • Health Care. ...
  • Veterans Benefits. ...
  • National Defense. ...
  • Transportation. ...
  • Education. ...
  • Veterans Benefits. ...
  • Health.

What are the 4 key characteristics of taxes? ›

The principles of good taxation were formulated many years ago. In The Wealth of Nations (1776), Adam Smith argued that taxation should follow the four principles of fairness, certainty, convenience and efficiency.

What are the three main types of taxes quizlet? ›

What are the three types of taxes? All taxes can be broken down into three categories-proportional, progressive, and regressive. Each type of tax is classified according to the way in which the tax burden changes as income changes.

What is system of taxation? ›

The tax system includes a large number of tax forms that differ in each system. This system is a set of institutes and instruments available to tax authorities for achieving certain fiscal, economic, social and political goals within the economic system.

What are the 4 main taxes we pay? ›

Here are seven ways Americans pay taxes.
  • Income taxes. Income taxes can be charged at the federal, state and local levels. ...
  • Sales taxes. Sales taxes are taxes on goods and services purchased. ...
  • Excise taxes. ...
  • Payroll taxes. ...
  • Property taxes. ...
  • Estate taxes. ...
  • Gift taxes.
4 Jan 2014

What are the four most common taxes? ›

The four most used tax bases are individual income, corporate income, sales, and property.

What are 5 things that taxes pay for? ›

The majority of tax dollars helps to fund defense, Social Security, Medicare, health programs and social safety net programs such as food stamps and disability payments, along with paying off interest on the national debt.

What is the best type of tax? ›

In the United States, the historical favorite is the progressive tax. Progressive tax systems have tiered tax rates that charge higher income individuals higher percentages of their income and offer the lowest rates to those with the lowest incomes.

What are the 3 basic forms used to file income taxes? ›

There are three personal income tax forms — 1040, 1040A and 1040EZ — with each designed to get the appropriate amount of your money to the IRS.

Videos

1. Economic Update: Nomi Prins on the Distorted US Financial System
(Democracy At Work)
2. Taxes 101 (Tax Basics 1/3)
(MoneyCoach)
3. The Basics of Tax Preparation
(Roosevelt University)
4. How Americans Avoid Taxes
(CNBC)
5. How the rich avoid paying taxes
(Vox)
6. Episode 18: VAT vs Flat Tax vs Graduated Income Tax
(Office of the Patriot)
Top Articles
Latest Posts
Article information

Author: Mr. See Jast

Last Updated: 11/29/2022

Views: 6400

Rating: 4.4 / 5 (55 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Mr. See Jast

Birthday: 1999-07-30

Address: 8409 Megan Mountain, New Mathew, MT 44997-8193

Phone: +5023589614038

Job: Chief Executive

Hobby: Leather crafting, Flag Football, Candle making, Flying, Poi, Gunsmithing, Swimming

Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.