As an American, you'll encounter taxes throughout your life. The money you pay in taxes helps maintain roads and fund government services. While understanding the taxes relevant to your situation can be daunting due to various associated costs, it's crucial to be aware of the taxes you might owe. Collaborating with a tax professional ensures you pay only what you owe, nothing more.

Direct Taxes

Direct taxes are those you are responsible for directly, meaning you pay them directly to the tax authority. Here are some examples:

Income Tax

Income tax is one of the most significant taxes you'll likely pay. You pay a percentage of your income to the federal and state governments. The amount you pay is determined by your earnings, with higher earnings placing you in a higher tax bracket. Tax brackets specify the tax rates based on your income.

Capital Gains Tax

You pay capital gains tax when you sell an asset at a profit. This tax applies to assets like bonds, stocks, art, cars, and your home. If an asset's value has increased since you purchased it, you owe this tax upon selling it.

Wealth Tax

Wealth taxes target individuals with high net worth, calculated by subtracting all debts from the total value of assets. You owe an additional wealth tax if your net worth exceeds a specific threshold. However, most countries don't levy a wealth tax, and its rate often varies based on economic conditions.

Inheritance and Estate Taxes

Estate taxes are applied in some situations when the value of an estate exceeds a pre-set threshold. In 2023, the federal exclusion limit was $12.92 million. The amount due is dependent on the amount above that limit. States also levy estate taxes, and their amounts differ as well.

An estate tax is not the same as an inheritance tax. Estate taxes are applied before the assets move to the beneficiary. Inheritance taxes, by contrast, are only paid in some states, and their value depends on numerous factors.

Corporate Tax

Corporations pay corporate taxes based on their profits. The government collects a percentage of these profits to fund federal programs. As of 2023, the U.S. corporate tax rate stands at 21%.

Indirect Taxes

Both consumers and businesses pay indirect taxes on goods and services. These taxes are remitted to retailers or other entities, who forward the payments to the government. Some examples include:

Value Added Tax (VAT) / Goods and Services Tax (GST)

A value-added tax is a consumption tax assessed on the value added at the various stages of the production process. Every company that manages the product at any stage of the production process will pay VAT with the previous VAT deducted from this. However, the consumer does not have that final deduction.

State and local governments typically use sales tax to raise funds. These are called goods and services taxes.

Sales Tax

You pay sales taxes at the time of the purchase of a product or service. It happens when you, as the consumer, pay for the purchase. You pay the tax to the business, which then pays the tax to the government. States and local agencies apply sales tax, and that tax rate can differ from one area to the next.

Excise Tax

Governments impose excise taxes on specific goods or activities beyond general consumption tax. Common items subject to excise taxes include soda, gas, cigarettes, and alcohol. These taxes often target products deemed harmful or those associated with negative societal impacts, like gambling. Additionally, excise taxes can serve as user fees, charging only those who use a particular service.

Custom Duty / Tariff

Governments impose tariffs or customs duties on goods and services imported into the country. These taxes aim to promote domestic purchases by making imported items more expensive.

Property Tax

Many counties levy a property tax based on the value of real estate. They typically use these funds to keep and maintain county facilities and deliver services.

Payroll Taxes

Employees pay payroll taxes, which employers deduct from their paychecks. Employers then send these taxes to the federal government to fund Medicare and Social Security programs. The employee and the employer contribute to payroll taxes as a percentage of the earned income.

Miscellaneous Taxes

You might encounter various other taxes. For instance, the tangible personal property tax applies to movable items like furniture or business inventory. Companies might pay gross receipts taxes based on their total sales, regardless of their profit levels.

Tourists often pay hotel room taxes upon booking a service. Additionally, use tax, typically linked with sales tax, is due when a buyer uses, stores, or consumes certain products or services.

Understanding Your Taxes

It can be challenging to know which taxes you have to pay. Working with a tax professional is an excellent way to ensure you make the correct payments and avoid overpaying your taxes. If you are unsure of any tax you owe, it’s wise to contact the local taxing authority for clarification.

Takeaway

Taxes are a big part of day-to-day life. They impact many of the financial decisions people make. It is always important to know what you can expect when paying taxes and to incorporate these additional costs into your budget.