Types of Taxes
There's a tax for almost every occasion—the IRS is just considerate like that.
Let's take a peek.
Earning money by working hard? Outstanding. The government wants to make your 40-hour-workweek and cranky boss even more attractive by taxing what you earn. Better yet, you might get taxed twice if your state also levies income taxes.
Income tax is graduated, meaning that the more you earn, the more you're taxed.
- From your first dollar earned up to $10,000, you don't pay any taxes.
- From $10,000 to $20,000, you might pay 10%.
- From $20,000 to $35,000 you might pay 15%.
And so on.
Some places have county taxes too. A few states (hello, Florida and Wyoming) have no income taxes, so you only have to deal with the income taxes the federal government takes from you. California, on the other hand, has the highest income tax rate (over 13%, depending on your income).
Real Estate Tax
If you buy a house, you pay property taxes. How much you pay depends. In California you pay 1.25% of the amount you paid for your house in the first year you move in. After that, there's an inflation index so that your tax rate grows with inflation. In Texas, your house is assessed by a professional assessor and a tax rate is applied based on what your home is worth. Usually, your property taxes can be used as a deductible against some of your other taxes.
Oh, and don't think you can be sneaky and get out of property taxes by renting. Your landlord bases your rent on what they pay for maintenance, property taxes, and other costs. Indirectly, your rent is going to towards taxes on the property.
While your car is eating up miles on the highway, it's also eating up the highway: cars and trucks roaring over asphalt eventually wear down the roads, and someone has to fix them. How do cities and states pay for the roads? They tax you at the gas pump. For every dollar you put into your gas tank, part of what you pay goes to the government for roads.
There's a lot of grumbling about gas tax. Okay, there's a lot of grumbling about all taxes, but there's even more with gas tax because it's a regressive tax. That means whether you're pulling up in a Porsche or driving up in your ancient VW that's got a fender hanging on with twine and big dreams, you're paying the same dollar amount of taxes with your gas.
If you're the guy in the VW, you're actually being harder hit by the tax because it's eating up more of your earnings while the tax is something the Porsche owner might not even notice.
Gas tax is a type of excise tax.
Levied by both federal and state governments, excises are taxes that are placed on some services or products. They look a little like sales taxes, but they're based on the amount of a service or product rather than on the price. Gas, alcohol, and tobacco are some of the products subject to these taxes.
When you buy a car at the dealership or used car lot, you're paying a tax on the purchase price.
But—yay!—you get to pay even more taxes on your car. There's a registration tax, license plate tax, and plenty of other taxes you'll pay by driving that thing around.
Enjoy that Honda, dude.
You decide to fly into New York City. You work hard; you deserve it.
You pay for the airfare, get a relatively inexpensive hotel room for $250 a night (that's pretty good in the Big Apple), and watch an off-off-Broadway show. But at home, you check your credit card and see that the hotel charged you $350, not $250.
Did they rip you off? Nope.
You paid a sales tax for the room, yes, but there's also an extra tax just for not being a New Yorker. Unless you want to stay at home or use the Wizard of Oz flying house method of travel, there's not much you can do about this one.
Personal Property Tax
Local and state governments impose personal property taxes on expensive stuff like boats and cars. Some states and local governments even add licensing fees to squeeze more money out of these buys. Those celebrities and football players with their huge car collections? Yeah, they're paying a lot of taxes.
The assessed value and the amount you paid for the house aren't the same, though. The fair market value is decided by a property assessor, while the price you pay is based on lots of stuff, including what the realtor and seller think you're willing to pay for the house. The assessed value is usually about 50-70% of the fair market value. It's a lot easier in Monopoly, where the hotels are a fixed price.
Local governments are the ones collecting property taxes, and they love this kind of tax. For one thing, it's hard to avoid paying property taxes—it's kind of hard to hide a whole house.
Thought you could escape the stress of tax season with some retail therapy? Fat chance. The government has even made the people at your local mall tax collectors. Every time that you buy a pair of jeans, a new phone, or almost anything else, you're taxed a percentage amount of whatever you're buying.
Sales taxes are all over the place—some states don't even have them. Since the tax is paid in the state where the purchase was received, some people get creative about shopping across state lines (maybe head to Oregon to buy that new iPhone?) or shipping their purchases from out of state to avoid paying these taxes.
P.S. A few things, like food, are exempt from sales tax. So if you want to drown your tax sorrows in ice cream you can do so tax-free.
Value Added Tax
This tax is levied on things that are being made. The tax is levied at each step of production and is based on the value of each specific step.
The idea for this tax was to stop smuggling. Some people were smuggling in goods to avoid sales tax, but by charging at stages of production the government could make sure that someone somewhere was paying up.
Corporate taxes tax the profits of businesses. Taxes can range from 15%-35% and will depend on the profits being made and whether the company is a corporation or a small business. If you run a very small business, you will usually be taxed by your income.
A public company owned by shareholders may need to pay extra taxes if it pays dividends. Here's an example: Let's say the company earns $1 billion before taxes. The company pays out in dividends half of its earnings by charter each year. On that billion, the company is taxed 25% in corporate taxes. It has $750 million left after taxes and pays half of that ($375 million) to its shareholders. The shareholders then pay about 30% on those dividends when they pay their income taxes.
In total, the government gets over $112 million in personal income tax from the shareholders because of those dividends, and it also gets $250 million by charging corporate taxes. The government is taking $362 million or more of the billion the company earned.
Fair on unfair? People love to argue about this one.
Investment Gains Tax
If you're making money on stocks or other investments, the government wants a piece of the action. If your stock was a stock option and not purchased by you directly, or if you had the stock for less than a year, you'll have to pay ordinary income tax (= a lot) on any gains you make. If you did have the stock for over a year, you'll still have to pay long term gain tax (= less).
Inheritance or Estate Tax
If your rich Aunt Edna of the pink hair and six French poodles leaves her $10 million estate to you, you may have to pay inheritance tax. This is the tax you pay when the estate is transferred to you; and you only have to pay if the estate is worth more than a certain amount (in 2009, the cut-off was $3.5 million).
So how is the value of the estate added up? The value of estate at the time of someone's death is calculated and then you subtract donations to charity (Aunt Edna left money to the Lonely Poodle Fund), funeral costs, and some property left behind to a living spouse. That final amount is the value of the estate.
If you have to pay inheritance tax on the total, it's going to cost you about 45%. Steep. But also: free money.
Think you can convince Aunt Edna to give you a few million now to avoid inheritance tax later?
The IRS has already thought of that.
If you give a family member or anyone a gift of more than a certain amount, they'll be charged 45% in estate tax. In 2009, the limit was $12,500, so anything above that number would be subject to a hefty tax.
If you're importing or exporting anything to or from the United States, you may have to deal with taxes known as tariffs. In the past, tariffs were an important way for the government to make money. Today, they're mostly used to protect some industries.
For example, there may be tariffs placed on certain foods, such as imported corn, to protect U.S. corn growers from cheap imported corn (which is not a threat itself—unless you lobbed it at someone's head—but which would hurt the U.S. corn industry if it were sold here; few people would buy more expensive U.S. corn if they could get the cheaper stuff grown somewhere else).
Environment Affecting Tax (Carbon Tax)
Some stuff—smoking, watching too much bad TV, driving your car a lot—are bad for you and for the environment.
The government can't do much about your addiction to the Kardashians, but they can place taxes on those actions that hurt the environment. And then they can use some of the money they get from those taxes to try to improve the environment (by, say, planting more trees or paying scientists to come up with new types of fuel).
One buzzy tax? The carbon tax, which companies need to pay if their company creates carbon emissions.
Poll Tax (a.k.a. Head Tax)
Income taxes are based on how much you earn. Head taxes, on the other hand, are levied by the federal government on everyone who is alive. They're easy to collect and administer because the requirements are so simple, but it does create some grey areas: should vampires and zombies be taxed if they are only kind of alive?
Because of the zombie loophole, these taxes aren't used by the IRS.