types of taxes

Get To Know Your Taxes: A Basic Guide To Types Of Taxes In America

Whether you love them, hate them, or simply tolerate them, taxes are a part of life for a reason and have nuances worth understanding.

Here’s a basic guide to the different types of U.S. taxes you should be aware of, why they are in place, and where the money goes.

Income tax: The federal government taxes your income, and most individual states do as well. States without income taxes will generally have higher taxes elsewhere.

policybasics-wheretaxdollarsgo-f1Federal income tax is collected by the Internal Revenue Service (IRS), and used for defense, social security, health insurance programs, safety net programs, interest on national debt, and other expenditures, as detailed by the White House.

The U.S. government also mandates that employers subtract a payroll tax from employees each pay period and match the deducted sums — these payments fund the nation’s Social Security system and Medicare.

Sales tax: In most states, bought items are charged with a sales tax. Percentages differ by state, ranging from 3 to 9 percent, taxed by state and sometimes also by city. Merchants are responsible for collecting the tax and depositing it with the state (or city) authority.

Varying percentages of sales tax are often set aside for specific uses like transportation, education, and local government, and the rest used for other state-level expenditures.

Some states also tax rentable personal property, resale goods, and services. When consumers buy taxable items in a state other than their own, their state’s tax is still applicable and they must pay a use tax.

Property tax: Property tax applies to real estate property with rates based on city, town, or county, and the property’s assessed value, which may differ from its market value. Apartments are not subject to property tax.

Like sales tax, these typically help pay for public schools, community colleges, and other local government matters.

Corporate tax: The U.S. imposes a tax on corporations on a federal, state, and sometimes local level at rates ranging from 15 to 35 percent of the company’s income.[contextly_auto_sidebar id=”oxtWpmiYr9DKdktMMBsxACke1dNDTeIa”]

America’s corporate taxes are the highest in the developed world at 39.1 percent, though many corporations enjoy enormous tax subsidies and pay much less.

Estate tax/gift tax: Estate taxes are for when, after you’re death, your heirs are be subjected to taxation on the property you leave behind if it’s over the standard limit.

Beneficiaries are only taxed if the estate is valued over a $5 million threshold. Estate taxes are imposed by the federal government, though some states impose additional inheritance taxes.

Transfers of wealth between living persons are called gift taxes, which apply to gifts valued over $14,000.

Hotel tax: On top of regular room rates, most hotels (including rented apartments, bed-and-breakfasts, motels, etc) also charge a hotel occupancy tax, which is paid by the occupant and collected by the hotel.

The tax is used for tourism promotion, furnishing, reparation, and hotel management.

Excise tax/sin tax: Excise tax is placed upon specific goods like gasoline, air transportation, sport fishing equipment, tires, indoor tanning, and more. The tax is levied in addition to the items’ sales tax as part of the marked price.

Some excise taxes are also called sin tax,  notably applied to commodities considered dangerous like tobacco, alcohol, guns, and gambling. The money goes to each city or town’s general fund for unrestricted use.

Updated. Cover photo courtesy of JD Hancock via Flickr.

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Jennifer Markert