How To Understand Taxes
There’s an old saying, ‘only two things are certain in life, death, and taxes.’ However cliche this statement might be, its truth can hardly be disputed. Understanding how taxes work can save you a lot of struggle and misunderstandings down the road.
So if you’re not sure about the mechanics of taxes, then keep reading.
Three Basic Types Of Tax.
The three main basic types of tax are taxes on what you earn, what you buy, and what you own. Remember that every dollar paid in tax started as a dollar made in income. One of the main differences between the types of taxes mentioned above is when you pay the tax.
Another type of tax is futa tax wherein companies pay into an unemployment fund that benefits those without work.
Taxes On What You Earn.
Individual income tax (or personal income tax) is levied on the wages, salaries, investments, and other capital that you earn. Many income taxes are ‘progressive,’ meaning that tax rates increase as the taxpayer’s income increases. This results in high-income earners paying a higher tax rate than low-income earners.
The US levies income tax between 10% and 37% depending on taxpayers’ income. The income ranges for which these rates apply are called tax brackets.
Other taxes on what you earn are corporate income tax, payroll, and capital gains tax.
Taxes On What You Buy
Sales taxes are a type of consumer tax levied on goods and services paid for. It is a method for states and local governments to raise revenue. Some people believe sales tax to be the most equitable form of taxation, as those who consume more voluntarily pay more.
Others view these taxes as regressive as the poor end up paying a larger portion of their income on taxes than their wealthier counterparts.
Taxes On Things You Own
Property tax, known as an ad valorem tax is added on to the value of real estate or other personal property you may own. Property taxes are usually imposed by local governments and collected regularly. Property owners will usually pay their property taxes either once a year or monthly as part of their mortgage payments.
Most people are familiar with real estate tax, but fewer are familiar with “tangible personal property” (TTP) such as vehicles and personal equipment owned by individuals and businesses.
Taxes on real estate tend to be more stable and predictable, whereas taxes on tangible personal property tend to be more problematic due to the many complications that easily arise.
Estate And Inheritance Tax
You’ll also be taxed on any inheritance you receive. Estate taxes are paid by the estate itself whilst inheritance tax is paid by the beneficiaries at the time of death of the estate owner.
Wealth taxes are usually imposed annually on an individual’s net wealth ( that is to say their total assets, minus any debts owed) This is only applicable to individuals who earn above a certain threshold.
To Sum Up
Taxes can be confusing to the uninitiated. The differences between countries, states, and localities only add to the confusion for many. The three main types of taxes in the USA can broadly be divided into taxes on what you earn, what you buy, and what you own. There are further subcategories to this of course, but I hope this helps you understand taxation better than previously.