7 Types of Tax You Should Know About
Taxes are unavoidable, but they don’t have to be confusing. In this article, we will explain the different types of tax that you may encounter in your personal or business life, and how they affect your finances. Whether you are an employee, a freelancer, a business owner, or a consumer, you should be aware of the various taxes that apply to your income and expenses.
Here are the seven types of tax that we will cover:
– Income tax
– Sales tax
– Property tax
– Payroll tax
– Capital gains tax
– Estate tax
– Excise tax
1. Income tax
Income tax is the most common type of tax that you pay as an individual. It is based on your income from various sources, such as wages, salaries, tips, dividends, interest, royalties, rents, alimony, pensions, and business profits. The amount of income tax you pay depends on your filing status, your deductions, your exemptions, and your tax bracket. The federal government and most states impose income tax on individuals, but some states do not have income tax at all.
The IRS collects federal income tax from individuals through withholding from paychecks, estimated tax payments, or filing a tax return. You can reduce your taxable income by claiming deductions for certain expenses, such as mortgage interest, charitable contributions, medical expenses, and retirement contributions. You can also claim exemptions for yourself and your dependents, which reduce your taxable income by a fixed amount. The tax brackets are the ranges of income that are taxed at different rates. The higher your income, the higher your tax rate.
2. Sales tax
Sales tax is a type of tax that you pay as a consumer when you buy goods or services. It is usually added to the price of the item or service at the point of sale. The rate of sales tax varies by state and locality, and sometimes by the type of product or service. Some states do not have sales tax at all, while others have different rates for different categories of items, such as food, clothing, or gasoline.
Sales tax is collected by the seller and remitted to the state or local government. You can avoid paying sales tax by buying items online from out-of-state sellers who do not charge sales tax. However, some states require you to report and pay use tax on purchases that you make online or from other sources that do not charge sales tax. Use tax is similar to sales tax, but it is paid by the buyer instead of the seller.
3. Property tax
Property tax is a type of tax that you pay as a property owner based on the value of your real estate or personal property. Real estate includes land and buildings, such as homes, offices, factories, and farms. Personal property includes vehicles, boats, furniture, jewelry, and other items that are not attached to land or buildings. The rate of property tax varies by state and locality, and sometimes by the type of property.
Property tax is assessed by local governments, such as counties, cities, towns, or school districts. You can reduce your property tax by claiming exemptions or deductions for certain types of property or situations, such as homesteads, senior citizens, veterans, disabled persons, or agricultural land. You can also appeal your property assessment if you think it is too high or inaccurate.
4. Payroll tax
Payroll tax is a type of tax that you pay as an employee or an employer based on your wages or salaries. It consists of two parts: Social Security and Medicare. Social Security is a federal program that provides benefits to retired workers, disabled workers, survivors of workers, and dependents of workers. Medicare is a federal program that provides health insurance to people who are 65 or older, disabled, or have certain diseases.
Payroll tax is collected by the employer and remitted to the federal government. The employer deducts half of the payroll tax from the employee’s paycheck and pays the other half. The current rates for payroll tax are 6.2% for Social Security and 1.45% for Medicare for both the employee and the employer. There is also an additional 0.9% Medicare surtax for high-income earners.
5. Capital gains tax
Capital gains tax is a type of tax that you pay as an investor when you sell an asset for more than you paid for it. An asset can be anything that has value, such as stocks, bonds, mutual funds, real estate, art, or collectibles.
The difference between the selling price and the purchase price is called a capital gain.
The opposite of a capital gain is a capital loss, which occurs when you sell an asset for less than you paid for it.
Capital gains tax is imposed by the federal government and some states on individuals and corporations.
You can reduce your capital gains tax by holding the asset for more than a year before selling it,
which qualifies it as a long-term capital gain.
Long-term capital gains are taxed at lower rates than short-term capital gains,
which are taxed at the same rates as ordinary income.
You can also offset your capital gains with your capital losses,
which reduces your taxable income.
6. Estate tax
Estate tax is a type of tax that you pay as a beneficiary when you inherit property from someone who has died. It is based on the value of the estate, which is the total of all the assets and liabilities of the deceased person. The estate tax is also known as the death tax or the inheritance tax.
Estate tax is levied by the federal government and some states on the transfer of property from the deceased person to the heirs or beneficiaries. You can reduce your estate tax by claiming exemptions or deductions for certain types of property or situations, such as spouses, charities, debts, funeral expenses, or estate administration costs. You can also avoid or minimize estate tax by planning ahead and using strategies such as trusts, gifts, or life insurance.
7. Excise tax
Excise tax is a type of tax that you pay as a producer or a consumer when you buy or sell certain goods or services. It is usually included in the price of the item or service and not separately stated. The purpose of excise tax is to discourage the consumption or production of certain goods or services that are considered harmful, such as tobacco, alcohol, gasoline, or gambling.
Excise tax is imposed by the federal government and some states on specific items or activities. The rate of excise tax varies by the type and quantity of the item or service. Some examples of excise tax are:
– Cigarette tax: $1.01 per pack of 20 cigarettes
– Alcohol tax: $13.50 per proof gallon of distilled spirits
– Gasoline tax: 18.4 cents per gallon of gasoline
– Gambling tax: 25% of gambling winnings over $5,000
These are the seven types of tax that you should know about. By understanding how they work and how they affect your finances, you can make better decisions and save money on your taxes.
How Different Types of Taxes Affect Global Demand
Income Tax and Global Demand
Income tax is a tax levied on the wages, salaries, investments, or other forms of income an individual or household earns. Income tax rates vary by country and by the level of income. Some countries have progressive income tax systems, where higher-income earners pay higher tax rates than lower-income earners. Other countries have flat income tax systems, where everyone pays the same tax rate regardless of income.
Income tax affects global demand in two ways. First, it affects the disposable income of consumers, which is the amount of income left after paying taxes and other mandatory expenses. Disposable income determines the purchasing power and consumption patterns of consumers. Higher income tax rates reduce disposable income and lower global demand for goods and services. Lower income tax rates increase disposable income and raise global demand for goods and services.
Second, income tax affects the incentives and behavior of workers and investors. Higher income tax rates may discourage work effort, entrepreneurship, saving, and investment, as they reduce the net return from these activities. Lower income tax rates may encourage work effort, entrepreneurship, saving, and investment, as they increase the net return from these activities. These effects may have long-term implications for global demand, as they affect the productivity, innovation, and growth potential of different countries.
Sales Tax and Global Demand
Sales tax is a tax levied on the sale of goods and services. Sales tax rates vary by country and by the type of goods and services. Some countries have general sales taxes that apply to most goods and services. Other countries have selective sales taxes that apply to specific goods and services, such as alcohol, tobacco, petrol, etc.
Sales tax affects global demand in two ways. First, it affects the prices of goods and services, which influence the quantity demanded by consumers. Higher sales tax rates increase the prices of goods and services and lower global demand for them. Lower sales tax rates decrease the prices of goods and services and raise global demand for them.
Second, sales tax affects the allocation of resources among different sectors of the economy. Higher sales tax rates may distort consumer choices and create inefficiencies in production and consumption. Lower sales tax rates may reduce distortions and create efficiencies in production and consumption. These effects may have long-term implications for global demand, as they affect the competitiveness, diversity, and quality of goods and services produced by different countries.
References:
http://www.constitution.org/tax/us-ic/cmt/ruml_obsolete.pdf
https://www.britannica.com/money/topic/taxation/Classes-of-taxes
https://www.irs.gov/taxtopics/tc400
https://www.taxpolicycenter.org/briefing-book/what-are-sources-revenue-federal-government
https://www.investopedia.com/terms/p/propertytax.asp
https://www.ssa.gov/oact/progdata/taxRates.html
https://www.investopedia.com/terms/c/capital_gains_tax.asp
https://www.investopedia.com/terms/e/estatetax.asp
https://www.investopedia.com/terms/e/excisetax.asp
