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Types of taxes include income tax, property tax, sales tax, and corporate tax. Tax money is used by governments to fund public services and infrastructure.

It supports administrative functions, public safety, environmental protection, and economic development. The allocation of tax revenue differs by region and government priorities, aiming to address societal needs, maintain essential services, and invest in initiatives for overall societal betterment.

Go through the article to find out the types of federal taxes.

What Are Taxes?

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Taxes are mandatory financial contributions imposed by governments on individuals, businesses, or properties to fund public services and government operations. They serve as the primary revenue source for governments, enabling the provision of essential services.

What do taxes pay for? These funds support societal needs and economic development, contributing to the functioning of a country's infrastructure, including education, healthcare, transportation, defense, public safety, social welfare programs, or environmental protection.

If you want to manage your taxes by yourself then learn the best ways to prepare taxes in a simple and easy way.

What is the Purpose of Taxes?

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Want to know the reason for the taxes? Taxes serve multiple crucial purposes within a society:

  • Taxes are the financial backbone of governments, providing the necessary revenue to fund public services like education, healthcare, infrastructure, and social welfare programs.
  • Through taxation, governments balance wealth distribution by collecting funds from higher-income individuals or profitable businesses and channeling resources to support the less affluent or those in need.
  • Taxation isn't solely about revenue; it's a tool for economic management, allowing governments to influence economic behaviors, stimulate growth, or control inflation by adjusting tax rates and incentives.
  • Essential public goods and services crucial for societal development, such as national defense, law enforcement, and public infrastructure, heavily rely on taxes as their primary funding source.

Major Three Types Of Taxes

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There are various ways to categorize taxes, but here are three common types:

  1. Direct Taxes: These taxes are imposed directly on individuals or entities and cannot be transferred to another person or entity. Examples include income taxes, property taxes, and wealth taxes. Direct taxes are paid directly by the person or entity responsible for the tax liability.
  2. Indirect Taxes: Indirect taxes are levied on goods and services rather than on individuals or businesses directly. These taxes are often passed on to consumers through higher prices. Examples include sales taxes, value-added taxes (VAT), excise taxes on specific goods like gasoline or tobacco, and customs duties on imported goods.
  3. Proportional, Progressive, and Regressive Taxes: Proportional taxes impose a constant tax rate regardless of income. Progressive taxes increase as income rises, ensuring higher earners pay a larger share. Regressive taxes take a larger percentage of income from lower earners.

1. Income Tax

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Income tax is a tax imposed on the income of individuals and businesses by the government. It's typically calculated based on various sources of income, such as salaries, wages, investments, and other earnings.

The amount of tax owed is determined by applying a specific tax rate or rates to the taxable income after accounting for various deductions, exemptions, and credits allowed by the tax laws.

Federal Income Tax Rates:

  • Single filers: 10% - 37%
  • Married filing jointly: 10% - 37%
  • Married filing separately: 10% - 35%
  • Head of household: 12% - 35%

State Income Tax Rates:

  • Range from 0% to 13.3%
  • Varies by state

2. Sales Tax

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This consumption-based tax is imposed by governments on the sale of goods and services. It's usually a percentage of the purchase price and is paid by the buyer at the time of purchase. Sellers are responsible for collecting the tax from the buyer and remitting it to the government.

  • State sales tax rates range from 0% to 7.25%.
  • The average combined state and local sales tax rate is 6.3% (excluding Alaska, Delaware, Montana, New Hampshire, and Oregon, which have no state sales tax).
  • Interest rates for late sales tax payments are set by each state. They are typically tied to the federal interest rate, which is currently 3.25% for the quarter ending December 31, 2023.

3. Property Tax

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Imposed by local governments on the value of real estate properties owned by individuals or businesses, this tax is typically based on the assessed value of the property, which is determined by local assessors. It is calculated by multiplying the assessed value of the property by the local tax rate.

Property tax assessments can be based on different valuation methods, such as the market value of the property, its potential income generation, or the cost to replace the property. Property owners often have the right to contest the assessed value if it's unfair.

  • The average effective property tax rate is 1.07%.
  • Rates can range from as low as 0.2% to as high as 4%.

4. Corporate Tax

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Corporate tax is a levy imposed by governments on the profits earned by businesses or corporations. It is typically calculated based on the company's taxable income, which is derived from its revenue minus allowable deductions and expenses according to tax laws.

The tax rate applied to a corporation's taxable income can vary based on the country or jurisdiction where the business operates. Some regions have a flat corporate tax rate, while others employ a progressive system, where the tax rate increases as a company's income rises.

  • The US corporate tax rate is a flat 21%.

5. Capital Gains Tax

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Capital gains tax is a tax levied on the profit made from the sale of capital assets, such as stocks, bonds, real estate, and collectibles. When you sell an asset for more than you paid for it, the difference is considered a capital gain and is subject to tax.

  • Long-term capital gains: These apply to assets held for more than one year. The current long-term capital gains tax rates are 0%, 15%, or 20%, depending on your taxable income.
  • Short-term capital gains: These apply to assets held for one year or less. Short-term capital gains are taxed as ordinary income, which means they are taxed at your marginal income tax rate, which can be as high as 37%.

6. Estate Tax

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The estate tax, also known as the "inheritance tax," is a tax levied on the assets of a deceased individual's estate. It applies to the entire estate, including all assets owned by the deceased at the time of death, such as:

  • Real estate
  • Stocks
  • Bonds
  • Cash
  • Life insurance proceeds
  • Retirement accounts

While there is no separate interest rate for the estate tax itself, penalties and interest may be charged on late payments. As of October 26, 2023, the current interest rate for late estate tax payments is 3.25%.

7. Gift Tax

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Gift tax is a tax imposed on the transfer of property or money from one person to another, where the giver does not receive adequate consideration in return. It's intended to prevent individuals from avoiding estate taxes by giving away their assets before death.

It often has exemptions for gifts made to spouses, charitable organizations, or for educational or medical expenses. Certain gifts, such as those below a certain value or used to pay tuition or medical expenses, are exempt from tax even if they exceed the exclusion amount.

  • The current interest rate for late gift tax payments is 3.25% as of October 26, 2023.

8. Excise Tax

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In the United States, excise taxes are levied on specific goods like gasoline, tobacco, alcohol, and firearms. These taxes are imposed either per unit (e.g., per gallon of fuel) or as a percentage of the product's value.

They serve dual purposes: generating revenue for the government and discouraging excessive consumption of certain items. Excise taxes are collected by businesses from consumers and then remitted to the government.

  • The current interest rate for late excise tax payments is set by the Internal Revenue Service (IRS) and is currently 3.25% as of October 26, 2023.

9. Payroll Tax

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Payroll tax refers to Social Security and Medicare taxes deducted from employees' wages to fund these federal programs. Social Security tax, at a fixed percentage, funds retirement, disability, and survivor benefits.

Medicare tax supports healthcare for seniors and certain disabled individuals. Both employers and employees contribute to these taxes. The Social Security tax has an income cap, while Medicare tax applies to all earned income.

  • The current interest rate is 4.0% as of December 31, 2023. This rate can change quarterly.

10. Customs Duties

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Also known as tariffs, they are taxes imposed by governments on goods imported into a country or exported from a country. These duties are levied at specific rates based on the value, quantity, or weight of the goods being transported across international borders.

Customs duties serve multiple purposes, including generating revenue for the government, protecting domestic industries by making imported goods more expensive, and influencing trade policies by regulating the flow of goods between countries.

  • As of December 31, 2023, this rate is 4.0%.

11. Alternative Minimum Tax (AMT)

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It is a parallel tax system aimed at ensuring individuals and corporations with high incomes pay a minimum amount of tax, preventing excessive use of deductions. It calculates tax liability by disallowing certain deductions and credits and setting a minimum tax rate.

Individuals or corporations subject to AMT recalculate taxes using this system and pay the higher of the AMT or regular tax. AMT exemptions and thresholds, initially designed to target the wealthy, have been adjusted to reduce their impact on middle-income taxpayers.

  • 26% on AMTI up to $197,900 for individuals and $207,350 for married couples filing jointly in 2023.
  • 28% on AMTI exceeding those amounts.

12. Local Taxes

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These taxes refer to levies imposed by municipal or regional governments on residents, properties, or businesses within a specific locality. These taxes finance local services such as education, public safety, infrastructure, and community programs.

They can include property taxes based on real estate values, sales taxes on goods and services within the jurisdiction, and local income taxes on earned income. Rates and types of local taxes vary widely across regions, with local governments determining tax policies.

  • Property taxes (avg. 1.1%)
  • Sales taxes (avg. 5.1%)
  • Income taxes (41 states, varying rates)

13. Unemployment Tax

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Unemployment tax refers to the tax paid by employers to fund unemployment benefits for workers who lose their jobs. It's a federal and state tax mandated in the United States, where employers contribute to state unemployment insurance programs.

The federal unemployment tax is set by the federal government, while states also levy a state unemployment tax (SUTA) to support their respective unemployment insurance programs. Employers must report their employee wages and pay unemployment taxes regularly.

  • Federal Tax Rate: 6.0%
  • Maximum Federal Tax: $42.00 per employee per year (calculated as 6.0% x $7,000)
  • Average Effective Tax Rate: 0.6%, though this varies significantly by state.

14. Sin Tax

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Sin tax refers to a levy imposed on goods or activities considered harmful to society, such as tobacco, alcohol, sugary drinks, or gambling. It aims to discourage consumption or behavior that can lead to health issues, addiction, or societal costs.

These taxes are often higher than regular sales taxes, intended to increase prices and reduce demand for these products. Revenue generated from sin taxes may fund healthcare programs or other initiatives addressing the negative consequences associated with these behaviors.

  • Alcohol: Federal excise tax of $13.50 per gallon for distilled spirits, $5.35 per gallon for wine, and $1.07 per gallon for beer.
  • Tobacco: Federal excise tax of $0.18 per pack of 20 cigarettes.
  • Gasoline: Federal excise tax of 18.4 cents per gallon.
  • Firearms: Federal excise tax of 10% of the sales price.

15. Carbon Tax

Source : sustainability-academy

A carbon tax is a levy imposed on the carbon content of fossil fuels or other greenhouse gas emissions. It's designed to reduce carbon dioxide and other greenhouse gas emissions, which contribute to climate change.

The tax is typically based on the amount of carbon dioxide or its equivalent emitted during combustion or industrial processes. A carbon tax aims to encourage a shift toward cleaner energy sources, energy efficiency, and the adoption of environmentally friendly practices.

  • No federal carbon tax is in place.
  • Some states and local jurisdictions have implemented their carbon pricing mechanisms.

Additional References for Tax Information in the US