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What you need to know about these 6 common types of taxes
What you need to know about these 6 common types of taxes
It’s everyone’s favorite time of year: Tax season. While there’s still time to file, you can also use this time to make sure you’re up to date on the different taxes you may have to pay. Here’s a quick rundown of six common types of taxes and what they’re used for.
Individual income tax
Individual income tax, also known as personal income tax, is imposed on the income an individual or household earns. Individual income taxes are one of the largest sources of revenue for the U.S. government, and they go to the general U.S. Treasury fund. If you’re an employee at a company, these taxes are typically withheld from your paycheck by your employer. However, if you’re self-employed or work as an independent contractor, you will likely be responsible for reporting and paying these taxes yourself.
In the U.S., individual income taxes are levied, or collected, on a federal level, as well as in some states and local governments. On a federal level, these taxes are progressive, which means the tax rate increases as taxpayer income increases. However, there are a number of exemptions and deductions available, so many Americans do not have to pay taxes on all of their income. Most states also levy income taxes, although the rates and the way they’re structured varies.
Payroll tax
Similar to individual income taxes, payroll taxes are deducted from an employee’s paycheck based on the income earned. The difference is in what these taxes support: Payroll taxes go to Social Security and Medicare funding, while individual income taxes are for general government funding. Like with individual income taxes, many states also impose payroll taxes.
Unlike income taxes, federal payroll taxes have a flat rate. This means everyone pays the same tax rate, regardless of income. However, a portion of federal payroll taxes are levied only up to a certain yearly limit. Any income that exceeds that limit, set at $142,800 in 2021, is not subject to the Social Security portion of the tax. This makes payroll taxes regressive, which means low-income and moderate-income earners pay a larger percentage of their income than high-income earners.
Capital gains tax
Capital gains taxes are applied to the profit made on an investment when it is sold, including stocks, property, land, and businesses. This only applies to profits from the sale of assets held for more than one year, which are known as long-term capital gains. Profits from assets and investments held for less than one year are referred to as short-term gains, and are taxed as normal income.
Capital gains can be reduced by capital losses incurred in that year, which occurs when you sell an investment for less than you purchased it for. Your capital gains tax is assessed based on your total long-term capital gains minus capital losses. The capital gains tax rates vary based on your tax bracket, and range from zero, 15%, or 20%.
Property taxes
Property taxes are taxes paid on property you own, calculated by the local government where the property is located. Cities, counties, and school districts all have the power to levy property taxes. Many states also impose property taxes. These taxes help fund local and state governments, education, transportation, parks and recreation, and more.
Property taxes are typically based on the overall value of your home, and in many areas, the rates are recalculated annually. Property taxes are determined by multiplying the property tax rate of the local government where the property is located by the current market value of the property, including any land owned. Property taxes are regressive, and, because they are determined by the value of the asset, have no relation to income level.
Estate taxes
Estate taxes are levied on the total value of a deceased person’s estate, which includes cash, real estate, insurance, and other assets. These taxes are paid out before any money is distributed to the beneficiaries. However, assets passed to a spouse are not subject to estate taxes. As of 2021, estate taxes are only levied on assets worth $11.7 million or more. States can also impose estate taxes, although only a few do.
Inheritance taxes
Inheritance taxes are state taxes paid by the beneficiaries of an estate on the amount inherited. Similar to estate taxes, only a few states levy inheritance taxes, and the rates and regulations vary state to state.
