Tax filing season is a pressure-inducing time for American taxpayers. They scramble to meet deadlines for something they’re not sure they know a lot about. Some prefer to work with accountants who are experts in the subject, but some have to or choose to do everything themselves for compliance.
Not many people are informed about tax policies in the United States, which shouldn’t be the case considering how much taxes take from the income of Americans. Sadly, that’s how the world works.
Everyone is required to pay their tax dues, and it’s only fair to do so. To give you some idea of the types of taxes you pay for, here’s a list of them with quick overviews that will help you in the upcoming filing season and your everyday consumption:
1. Consumption Tax
Yes, you do have to pay taxes for the money you spend on goods and services. The sales tax you’re familiar with is under this type of tax and is leveraged by states and local governments to raise revenue to provide resources for their citizens.
Taxing goods such as alcohol and gasoline is a way of consumption tax. Economists and presidential candidates who ran with federal consumption tax reforms can offset capital gains taxes and dividends.
2. Progressive Tax
For Americans with higher income, the progressive tax is due. The U.S. federal income tax requires wealthy individuals to pay higher tax rates than the less wealthy. Simply put, the rich pay higher taxes compared to middle-class individuals. The cycle goes on—middle-class Americans pay higher taxes than working-class Americans.
This means that if you’re earning well, you’re up to pay more.
3. Regressive Tax
Regressive tax doesn’t have a cycle that progressive tax has. This type of tax can either imply that tax rates are lower for wealthy individuals or that people of all income levels pay the same rate—or a flat rate.
It’s regressive because a flat rate’s effect on a person earning millions annually won’t feel the bump of a 15% percent tax rate as much as someone who earns $30,000 yearly will.
4. Proportional Tax
Similar to a flat tax, taxpayers pay the same proportion in taxes. They’re regressive and are common in state-level sales taxes but are rare in the federal tax levels.
The 2012 presidential race is prominent for the 9-9-9 proportional tax proposal plan. It proposed a 9 percent business transaction tax, 9 percent personal income tax, and 9 percent sales tax.
It is regressive in the sense that individuals with higher income won’t feel the spending dent the 9-9-9 Plan will make on their income as much as lower-income individuals would.
America is yet to adopt the value-added tax system, but it’s prominent in other countries. The VAT system taxes on the “added value” of a product or service, which is the difference between the selling price and the cost of production.
It’s a form of consumption tax paid by consumers, typically likened to sales tax. But the sales tax is paid by the buyer at the final stage of a sale. But the VAT is paid from production to final sale. Simply put, you won’t even notice you’re paying VAT as you purchase items.
6. Property Tax
Property taxes are the ones you pay on commercial real estate, land, or homes. In creating a budget for a home purchase, you should always factor in the property taxes due.
They don’t amortize, and you have to continue making payments as long as you live and use the property being taxed. But this type of tax has exemptions for the disabled, elderly, and veterans.
7. Capital Gains Taxes
Capital gains taxes apply to income gained after an investment is sold and there is capital gain. As most Americans don’t invest, fewer people pay this type of tax.
Capital gains tax has international taxes in its view, with income from foreign sources due to taxes in the individual’s homeland and one or more foreign countries.
8. Estate Taxes
Estate or inheritance taxes are due for payment after someone’s passing. The estate tax is paid from the net worth of the deceased and a tax applied on the privilege of passing on their assets to their kin.
Estate taxes are both federal and estate, meaning citizens are subject to both. The case isn’t the same for inheritance taxes because it only exists at the state level. Inheritance taxes are taxes paid for inheriting assets paid by the heir.
9. Payroll Taxes
Payroll taxes cover your disability and survivor benefits, Social Security, and Medicare contributions. Part of goes to your federal unemployment benefits, which are exercised when you qualify after the loss of employment.
10. Income Tax
Income taxes are a household name to working Americans. You may not know about the other taxes you pay, but you surely know about this one.
Income taxes are progressive and marginal. Marginal defines the different rates per income bracket. High earners pay more, but only based on the amount in their bracket.
With this information in mind, you can now understand where your hard-earned money goes.