In the USA, The Type of Taxes Levied is vary at each Level of Government. The Taxes has ben imposed at different level like the federal, state, and local levels.
Money is the perquisite to run the any Government. Generally, The government’s primary source of revenue comes from taxes levied on the public. Taxation of citizens serves as the backbone of government funding, enabling it to provide essential services.
Taxes are the lifeblood of government funding, and they play a crucial role in supporting a wide range of essential jobs and services that benefit everyone
Federal taxes help pay for national things like the President, Congress, federal judges, and the military. State taxes pay for local roads and the governor. County and city taxes help pay for schools, fire trucks, and the police.
Without taxes, the government couldn’t run, so as much as we don’t like paying taxes, doing so is an important part of living in a society.
In this article, we’ll define various types of taxes in the United States and how they impact you and your income.
A tax is money that the government collects to pay for everything that the government does. we work for money or an income. The government takes a portion of this as a tax.
All the money you make during the year is considered income. no matter how you make it if you work at a job for wages that’s income if you win the lottery that’s income too if you own property like a house then you probably have to pay property taxes.
Types Of Taxes In The USA
Let’s understand the the different types of taxes in the USA. Here are the list of Some of the Taxes that are levy by US Government.
- Federal Tax/ Income Tax
- Property Tax
- Sales Tax
- Estate Tax
- Gift Tax
- Social Security Tax
- Medicare Tax
- Tariffs
Federal Tax/ Income Tax
Income tax is tax taken from the income or money an individual or business earns. In 1913, the Sixteenth Amendment gave the federal government the power to levy an income tax, “levy”, means to collect.
Individuals pay Personal Income Tax which is usually taken directly out of their paychecks. this method of taking money directly from a person’s paycheck is called withholding, by automatically withholding the tax money from a person’s paycheck, it makes it easier for individuals to pay their taxes and for the government to collect taxes.
When income tax is due in April of each year most people only owe a little extra money or may even get a refund if too much money was withheld.
Businesses pay something called corporate income tax this tax is based on their annual profits.
Both personal and corporate income taxes are progressive. It mean the more an individual or business earns the more money they pay in taxes. Each year the federal government depends on income taxes for about 50% of its total revenue.
Income tax is what’s called a progressive tax which means that those who make more money pay a higher tax rate if you make very little money. You pay no income tax at all if you make a decent amount of money, you pay a fraction of it to the government.
If you make a lot of money the fraction you pay is theoretically higher. This system is designed this way because those who have enough money not have to worry about putting food on the table each day. Can afford to pay more to the government.
Income taxes are a percentage of the money someone makes on their job. There are different types of income tax including federal state and local income tax. Federal rates can be anywhere from 0% To 39.6% and state rates run from 0% To 13.3% in some states people can pay up to 52% of their income in income taxes. Alone your report and file these taxes each year by April 15th.
Read more : Annual Mandatory Compliances for LLC
Property Tax
The second type of tax we will learn about today is property tax. Property tax is tax paid on property, most commonly real estate, like land and houses but sometimes on other types of expensive property like jewelry or cars.
To determine how much tax should be levied on a particular piece of property, the government sends out an Assessor to examine the property’s worth, they take into account size, location, reference materials, and past experience when determining a property’s value.
A percentage of that value is levied as property tax. Property taxes are the primary source of revenue for local governments.
Property tax is usually a percentage of the current value of the house if you own a $ 3,00,000 house and the tax is 3% then each year you have to pay the government $ 9,000 in taxes.
These taxes are paid when you make a major purchase like a car or home and again each year based on the value of the item your home tax may be included as part of your monthly mortgage payments.
Sales tax
It is a Tax levy on selling the products. Sales tax is incurred at the point of purchase, and the business from which you buy goods is responsible for remitting that money to the government.
Use/Sales tax is placed on all retail sales in many areas sometimes items like food or clothing are exempt from sales tax in some places every time you buy something at a store, they add on the tax at the end that’s the sales tax.
The rate of tax may vary depending on where you shop and what you buy businesses also have to pay all sorts of business taxes depending on how much profit they have and there are lots of other taxes such as tariffs on imports gift taxes, estate taxes, and unemployment taxes.
There are two types of sales tax general sales tax and excise taxes.
- General Sales Tax: General sales tax is a tax levied on most goods you buy.
- Excise Tax: Excise taxes are taxes levied only on certain items for example, many states have excise taxes in the form of gasoline taxes, cigarette taxes, and alcohol taxes, due to the nature of the items they are levied on, excise taxes are sometimes referred to as “sin taxes”. Almost every state levies a sales tax and many local governments do too.
Also Check: Wyoming Sales Tax: A Simple Guide for Businesses and Individuals
Estate Tax
An estate tax is a tax on property or money left behind when a person dies.
An estate is all the money and property that belongs to a person and currently, if a person dies and leaves behind an estate valued at five million four hundred and ninety thousand dollars or more. The federal government may levy an estate tax and take a portion.
Gift Tax
The gift tax is imposed on the transfer of property from one individual to another when nothing or less than the full value is received in return. This tax is applicable irrespective of whether the donor intends the transfer to be a gift.
There are two Limit for Gift Tax in USA. Any amount or property gifted in excess of that is liable for Gift Tax in U.S.A.
- Annual Exclusion (2024): $18,000 per person
- Lifetime Exemption (2024): $13.61 million
Annual Exclusion Limit for Gift Tax
Annual Exclusion Limit for Gift Tax is the amount you can gift to any one person, per year, without paying any gift tax. This amount is adjusted for inflation.
For 2024, Annual Exclusion Limit for Gift Tax in USA is $18,000. You can give this amount to as many people as you want, without exceeding the exclusion for any one person.
Lifetime Exemption Limit for Gift Tax
Lifetime Exemption Limit for Gift Tax is the total amount you can give away over your lifetime without paying any gift tax. This amount also rises for inflation.
Currently, Lifetime Exemption Limit for Gift Tax for 2024 is $13.61 million. If you give away more than this amount in your lifetime, the excess will be added to your estate value and potentially subject to estate tax when you die.
Things to be take care while Gifting the Money or Property.
Here are some additional points to keep in mind while Gifting the Money or Property to someone else in USA.
- Married couples can double the annual exclusion: If you are married and file jointly, you can give up to $34,000 per recipient in 2023 and $36,000 in 2024.
- Gifts to spouses are not taxable:Â Any gifts you make to your spouse are not subject to gift tax.
- Certain gifts are not taxable:Â Some gifts, such as tuition or medical expenses paid directly to the provider, are not considered taxable gifts.
For gifts exceeding the annual exclusion, you need to file a gift tax return (Form 709) with the IRS, even if you don’t owe any tax. This helps track your lifetime exemption usage.
If you’re considering making a large gift, it’s always a good idea to consult with a tax advisor to make sure you understand the potential tax implications.
Social Security Tax
In US, Social Security tax is established in 1935. Social Security provides income to elderly people and people who are permanently disabled.
It is funded by a 15-point 3% tax, that is paid by employees and their employers. This is another tax that is taken directly out of your paycheck.
Social Security tax: One tax that comes out of your paycheck is the Social Security tax. This tax is meant to help people when they retire.
Once you’re old enough you can start collecting a Social Security check. Until then you will pay a portion and your employer will also pay into this tax.
Medicare Tax
Medicare is a health insurance program for the elderly and disabled, the Medicare tax is also taken from your paycheck.
This tax comes out of your paycheck too it pays to help people age 65 and over who are sick and need medical care.
You will pay part and your employer will also kick some in on your behalf in addition to the payroll taxes.
Tariffs
Tariffs are taxes on imported goods, import means to bring in goods from another country.
Many products sold in the United States are made in other countries for a lower price and then shipped here. To encourage businesses to sell American-made products.
Sometimes the federal government charges these companies tariffs on the foreign goods they import. Aside from taxes the federal government raises revenue in a variety of other ways.
For example; oftentimes the government owns land that it no longer needs or uses sometimes it will sell this property, but usually, it will rent or lease this land to make more money in the long term.
The federal government may own land that contains mines or oil they can rent or lease this land to companies that want to dig mines or drill for oil and make more money in the long term than mining or drilling that land themselves.
The government also raises revenue by charging tolls to use certain roads, and fees for things like driver’s licenses, and fines for things like littering also raise money for the government, as do state lotteries.
State and local governments raise anywhere from nine to forty-seven percent of their revenue from non-tax sources like these, however, the federal government gets less than two percent of its revenue from these sources.
Expenditures
Uses of revenue; when the government spends tax dollars, we call these expenditures.
There are two main categories of government expenditures.
- The purchase of goods and services, which includes things like defense, the military, highways, jails, etc.
- Transfer payment: Transfer payments are made to individuals; examples of transfer payments include welfare payments, Social Security payments, and unemployment compensation.
- Subsidy: Another type of transfer payment is called a subsidy, subsidies are money provided by the government for programs meant to benefit the public, for example, Boys & Girls Clubs of America are programs that provide quality after-school activities for children in the United States and they are partially funded by the federal government. The complete federal budget is hundreds of pages long and is made up of thousands of these two types of expenditures because of the many types of taxes the federal government collects, they can provide these services.
Withholding taxes
Withholding taxes are payroll taxes where the employer withholds a percentage of the employee’s income for federal tax, state tax, and local Income Taxes.
Payroll withholdings are taken out of an employee’s paycheck every time. Payroll is run there are federal tax, state tax, and sometimes even local taxes.
Employer Taxes
Payroll taxes that are paid by the employer only.
Some payroll taxes like Medicare and Social Security are shared taxes split between the employer and employee. Employers are responsible for payroll taxes for their employees.
However, employers are not responsible for managing payroll taxes for contractors.
The amount on your paycheck before taxes are taken out is gross pay. The amount after payroll taxes and other deductions like benefits is net pay. You are also known as take-home pay.
Unemployment Tax
Employers do indeed pay unemployment taxes for each employee, both at the state and federal level. These taxes play a crucial role in supporting individuals who become unemployed.
State Unemployment Tax (SUTA)
- Every state has its own unemployment insurance program funded by the SUTA.
- The tax rate varies by state, typically ranging from 2% to 5% of an employee’s wages.
- The taxable wage base may also differ from state to state, but it’s often capped at a certain amount (e.g., the first $7,000 of wages earned in a year).
- The funds collected through SUTA are used to pay unemployment benefits to eligible workers who have lost their jobs through no fault of their own.
Federal Unemployment Tax Act (FUTA)
- This federal law imposes a 6.0% tax on the first $7,000 of wages paid to each employee during a calendar year.
- However, employers can take advantage of a credit that reduces the effective FUTA tax rate to 0.6% if they pay their state unemployment taxes on time and in full.
- The funds collected through FUTA are used to help states that have exhausted their own unemployment insurance funds and to administer the unemployment insurance program overall.
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