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Financial Literacy

Financial Literacy

Home Financial Literacy Taxes Shmaxes Differences Between Federal and State

Differences Between Federal and State

Tax Flavors: Income, Sales, Ownership, Use, To Be Legal…

Taxes come in a wide variety of flavors. Sometimes you may need more than one scoop. Sometimes you’ll want it in a cup, sometimes in a cone. With or without caramel sauce. What were we talking about again?

Oh right – taxes. Aside from income and sales taxes, there are also taxes on the ownership of real property, businesses, and even the gas you buy to fill up your tank. In fact, just about every financial transaction you ever make will be affected in some way by taxes. Unless you are making purchases “under the table,” which, as you should have been able to tell from the quotation marks, isn’t strictly kosher.

Here is a potpourri of different taxes you’ll encounter in a random walk through life.

Personal Property Tax - The most common types of personal property taxes occur on large ticket movable items such as cars and boats. Many state and local governments will impose licensing fees for these items as an additional means to generate revenue. Jay Leno must be swimming in it.

Property Tax - Property tax is an Ad Valorem tax based on the assessed value of a property. Ad Valorem simply means that the tax is based on the value of the asset (land, building etc.) being taxed. The assessed value of a property (off of which property tax is determined) is typically 50-75% of the fair market value of a given property. The fair market value of a property is determined by a property assessor and then that number is multiplied by a predetermined percentage to get the assessed value. The figures are much more favorable if playing Monopoly.

Property taxes are typically levied by local governments and are the preferred source of taxation for these government entities. The revenue stream from property taxes is relatively stable and predictable because of the difficulty for individuals to hide real property from tax collectors. It’s tough to dress your house up like your Aunt Susan from Florida and slip that one by your local gov. Even if they do share a similar bone structure.

Corporate Tax - The corporate tax is just as it sounds: a tax on the profits of corporations. The taxation for specific corporations is largely dependent on their corporate structure (that means that most small businesses are taxed differently than large corporations), but for most large corporations taxes on profits can be as high at 35% and as low as 15%. Taxes for small businesses are usually taxed as income to owners, effectively bypassing the corporate tax.

Sales Tax - The sales tax is probably the tax that all of us are most familiar with and the one which we pay most frequently. Sales tax is simply a consumption tax based on the value of a good. However, many times necessity items such as food (you didn’t realize that packet of Twinkies was a “necessity item,” did you?) are exempt from sales tax. A sales tax requires merchants who sell goods to serve as tax collectors for the government.

Value Added Tax - A value added tax is a tax which is levied on goods at each step in the production process based on the amount of value added to that item during that particular step. In other words, instead of simply levying a sales tax at the point of sale, taxes are levied upon every business from production to consumption.

This original motive for the implementation of a value added tax was that high sales taxes were leading many individuals to smuggle in goods to circumvent the tax. By taxing at every stage of production governments were able to collect all the tax they would have otherwise been collecting with the sales tax without the smuggling. This is not to be confused with the act of sneaking non-wizards into Hogwarts, which is instead referred to as “muggling.”

Inheritance Tax - The inheritance tax is a tax on the transfer of an individual’s estate after death to his or her heirs. If your ancient, rich great-grandma Edith is at death’s door and you’ve been wondering what her passing will mean for your finances, listen up. This tax only applies to estates over a certain threshold, which in 2009 was 3.5 million dollars. If Edith is worth that much, good for you.

The value of an estate is determined by the value upon death minus funeral costs, charitable gifts, and certain property left to a living spouse; the total is considered the taxable estate. The tax rate for estates over 3.5 million is 45%, so all inheritance beyond that figure will be subject to that tax.

Gift tax - The gift tax is the living cousin of the estate tax. The gift tax is designed to prevent individuals from passing along their wealth during their lifetimes in an effort to avoid any potential estate taxes. In 2009, one individual could only give gifts of $12,500 to another person; anything above that would be taxed at the estate tax rate of 45%. So you’ll want to tear up that $13,000 check you’ve been keeping in your back pocket.

Tariffs - A tariff is a tax that is imposed on an imported or exported good. In previous centuries, the tariffs made up a much greater percentage of US government revenues than they do today. Our government does still uses tariffs, but primarily for purposes other than revenue generation. Tariffs can also be used to protect domestic industries by making imported goods increasingly expensive relative to those produced domestically.

Excise Tax - An excise is simply a duty (he he… “duty”) levied by the government on specific products or services. Excises (such as deep knee bends or leg curls) can be levied at both the state and federal level. Excises are different from sales taxes in that they are typically imposed based on the quantity of a good or service rather than based on the price. Common goods which have excise taxes are tobacco products, gas, and alcohol.

Environment Affecting Tax (Carbon Tax) – These are taxes which serve two purposes from a government perspective. First: to increase the costs of an action that has adverse side effects for the majority of society, and second: to provide the government with a pool of revenues it can use to mitigate the damages of a particular action on society. A common environment effecting tax in the news today is the carbon tax, which taxes the carbon emissions by corporations. One smog step for man…

Poll Tax - Commonly known as a head tax, a poll tax is a tax that is levied at a fixed amount per individual. It differs from something like an income tax in which one’s tax burden is determined by their relative earnings. The advantages of a poll tax for the government is that it is easy to administer. (Are you a person? Okay, then you pay a tax.) There was some limited historical use of the poll tax; however, it never gained broad popularity among officials or tax payers. Mostly because it became very hard to tell if certain individuals were people, especially during the Great Chimp Uprising of 1927.

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