What Are Taxes?

Taxes are mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national. Tax revenues finance government activities, including public works and services su🤪ch as roads and schools, or programs such as Social Secu💧rity and Medicare.

In economics, taxes fall on 澳洲幸运5官方开奖结果体彩网:whoever pays the burden of the tax, whether this is the entity being taxed, such as a business, or the end consumers of the business’s goods. From an accounting perspec𝓰tive, there are various taxes to consider, including payroll taxes, federal and state income tax♓es, and sales taxes.

Understanding Taxes

To help fund public works and services—and to build and maintain the 澳洲幸运5官方开奖结果体彩网:infrastructure used in a country—a government usually taxes its individual and corporate residents. The tax collected is used for the betterment of the economy and all who are living in it.

In the United States and many other countries in the world, income taxes are applied to some form of money received by a taxpayer. The money could be income earned from salary, 澳洲幸运5官方开奖结果体彩网:capital gains from investment appreciation, 澳洲幸运5官方开奖结果体彩网:dividends or interest received aಌs additional ꦑincome, payments made for goods and services, and so on.

Tax revenues are used for public services and the operation of the government, as well as for 澳洲幸运5官方开奖结果体彩网:Social Security and Medicare. As the large baby boomer generation has aged, Social Security and Medicare have claimed increasingly high proportions of the total federal expenditure of tax revenue. Throughout U.S. history, tax policy has been a consistent source of political debate.

A tax requires a percentage of the taxpayer’s earnings or money to be taken and remitted to the government. Payment of taxes at rates levied by the government is compulsory, and 澳洲幸运5官方开奖结果体彩网:tax evasion—the deliberate failure to pay one’s full tax liabilities—is punishable by law. (On the other hand, 澳洲幸运5官方开奖结果体彩网:tax avoidance—actions taken to lessen your tax liability and maximize after-tax income—is perfectly legal.)

Most governments use an agency or department to collect taxes. In the United States, this function is performed federally by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS).

Types of Taxes

There are several very common types of taxes:

• 澳洲幸运5官方开奖结果体彩网:Income tax—A percentage of generated income that is relinquished to the state or federal government
• 澳洲幸运5官方开奖结果体彩网:Payroll tax—A percentage withheld from an employee’s pay by an employer, who pays it to the government on the employee’s behalf to fund Medicare and Social Security programs
• 澳洲幸运5官方开奖结果体彩网:Corporate tax—A percentage of corporate profits taken as tax by the government to fund federal programs
• 澳洲幸运5官方开奖结果体彩网:Sales tax—Taxes levied on certain goods and services; varies by jurisdiction
• 澳洲幸运5官方开奖结果体彩网:Property tax—Based on the value of land and property assets
• Tariff—Taxes on imported goods; imposed with the aim of strengthening domestic businesses
• 澳洲幸运5官方开奖结果体彩网:Estate tax—Rate applied to the 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) of property in a person’s estate at the time of death; the total estate must exceed thresholds set by state and federal governments

Tax systems vary widely among nations, and it is important for individuals and corporations to carefully study a new locale’s tax laws before earning i﷽ncome o🐠r doing business there. 

Below, we will take a look at various tax situations in the United States. Generally speaking, the federal government levies income, corporate, and payroll taxes; the state levies income and sales taxes; and municipalities or other local governments mainly levy property taxes.

Income Tax

Like many nations, the United States has a 澳洲幸运5官方开奖结果体彩网:progressive income tax system, through which a higher percentage of tax revenues are collected from high-income individuals or corporations than from low-income individual earners. Taxes are applied through marginal 澳洲幸运5官方开奖结果体彩网:tax rates.

A variety of factors affect the marginal tax rate that a taxpayer will pay, including their filing status—澳洲幸运5官方开奖结果体彩网:married filing jointly, 澳洲幸运5官方开奖结果体彩网:married filing separately, single, or 澳洲幸运5官方开奖结果体彩网:head of household. Which status a person files 澳洲幸运5官方开奖结果体彩网:can make a significant difference in how much they are taxed. The source of a taxpayer’s income also makes a difference in taxation. It’s important to 🗹learn the terminology of the different income types that may affect how income is taxed.

澳洲幸运5官方开奖结果体彩网:Capital gains taxes are of particular relevance for investors. Levied and enforced at the federal level, these are taxes on the profit generated when you sell an asset that's increased in value.

The rate of taxation on the profit depends on the length of time for which the asset was held. Short-term capital gains (on assets sold one year or less after they were acquired) are taxed at the owner’s ordinary income tax rate, whereas long-term gains on assets held for more than a year are taxed at a lower capital gains rate—based on the rationale that lower taxes will encourage high levels of capital investment. 澳洲幸运5官方开奖结果体彩网:Tax records should be maintained to substantiate the length of ownership when both the assets were sold and💜 the tax return 𒅌was filed.

Payroll Taxes

Payroll taxes are withheld from an employee’s paycheck by an employer, who remits the amount to the federal government to fund Medicare and Social Security programs. In 2024, employees will pay 1.45% into Medicare on all wages and 6.2% into Social Security on the first $168,600 earned, increasing to $176,100 in 2025.

Payroll taxes have both an employee portion and an employer portion. The employer remits both the employee portion, described above, and a duplicate amount for the employer portion. The employer rates are the same 6.2% for Social Security up to the wage base limit, and 1.45% for Medicare on all wages. Therefore, the total remitted is 15.3% (6.2% employee Social Security + 6.2% employer Social Security + 1.45% employee Medicare + 1.45% employer Medicare).

Payroll taxes and income taxes differ, although both are withheld from an employee’s paycheck and remitted to the government. Payroll taxes are specifically to fund Social Security and Medicare programs. A self-employed individual must pay the equivalent of both the employee and employer portion of payroll taxes through self-employment taxes, which also fund Social Security and Medicare.

Corporate Taxes

Corporate taxes are paid on a company’s taxable income. The s﷽teps to calculate a company’s taxable income are:

• Sales revenue - 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS) = 澳洲幸运5官方开奖结果体彩网:gross profit
• Gross profit - 澳洲幸运5官方开奖结果体彩网:operating expenses such as 澳洲幸运5官方开奖结果体彩网:general 📖and administrativ🧸e expenses (G&A), selling and marketing, 澳洲幸运5官方开奖结果体彩网:research and development (R&D), 澳洲幸运5官方开奖结果体彩网:depreciation, etc. = 澳洲幸运5官方开奖结果🥂体彩网:earnings before interest and taxes (EBIT)
• EBIT - 澳洲幸运5官方开奖结果体彩网:interest expense = taxable income

The corporate tax rate in the United States is currently a flat rate of 21%. Before the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act (TCJA) of 2017, the corporate tax rate was 35%.

In August of 2022, the United States Congress passed a new 15% corporate minimum tax into law as part of the Inflation Reduction Act of 2022. This new minimum tax only affects U.S. corporations with three-year average book values of $1 billion or more and foreign corporations with three-year average U.S. income over $100 million. 

Sales Taxes

Sales taxes are charged at the 澳洲幸运5官方开奖结果体彩网:point of sale when a customer executes the payment for a good or serviꦡce. The business collectsღ the sales tax from the customer and remits the funds to the government.

Each state can implement its own sales taxes, meaning they vary depending on location. There's even room for cities and counties to use their own rates, provided that they abide by the taxing rules of their state.

In 2024, the highest average state and local sales tax rate was found in Louisiana, at 9.56%. Five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—did not have a state sales tax, although Alaska did allow municipalities to charge local sales tax.

Property Taxes

A common property tax in the United States is the real estate 澳洲幸运5官方开奖结果体彩网:ad valorem tax. A 澳洲幸运5官方开奖结果体彩网:millage rate is used to calculate real estate taxes; it represents the amount per every $1,000 of a property’s assessed value. The property’s assessed value is determined by a property assessor appointed by the local government. Reassessments are typically performed every one to five years.

Property tax rates vary considerably by jurisdiction and many states also tax 澳洲幸运5官方开奖结果体彩网:tangible personal property, such as cars and boats.

In FY 2022, the state with the highest property effective tax rate was New Jersey at 2.08%. The lowest state ranking was Hawaii at 0.26%.

Tariffs

A tariff is a tax imposed by one country on the goods and services imported from another country. The purpose is to encourage domestic purchases by 澳洲幸🐟运5官方开奖结果体彩网:incr♒easing the price of goods and services imported from other countries.

There are two main types of tariffs: fixed fee tariffs, which are levied as a fixed cost based on the type of item, and ad valorem tariffs, which are assessed as a percentage of the item’s value (like the real estate tax in the previous section).

澳洲幸运5官方开奖结果体彩网:Tariffs are politically divisive, with debate over whether the policies work as intended.

Estate Taxes

Estate taxes are levied only on estates that exceed the exclusion limit set by law. In 2024, 澳洲𝄹幸运5官方开奖结果体彩网:the f꧃ederal exclusion limit is $13.61 million, increasing to $13.99 million in 2025. Surviving spouses are exempt from estate taxes.

The estate tax due is the taxable estate minus the exclusion limit. For example, a $15.7 million estate would owe estate taxes on $2.09 million in 2024 ($1.71 million in 2025).

The estate tax rate is a progressive marginal rate that increases from 18% to 40%. The maximum estate tax rate of 40% is levied on the portion of an estate that exceeds the exclusion limit by more than $1 million.

States may have lower exclusion limits than the federal government, but no state taxes estates worth less than $1 million. Only Oregon has the $1 million exemption limit. State rates are also different from the federal rate. In 2024, the highest state estate tax rate, implemented in Hawaii and Washington, was 20%.

Estate taxes are different from inheritance taxes in that an estate tax is applied before assets are disbursed to any 澳洲幸运5官方开奖结果体彩网:beneficiaries. An inheritance tax is paid by the beneficiary. There is no federal inheritance tax, and, as of 2024, only six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa will completely phase out its inheritance tax by 2025.

Tax Delinquency

Every type of tax has a different due date or reporting requirem🌟ent. Some are collected immedia𝓀tely at the time of a transaction or leading up to a transaction like sales taxes or tariffs. Others are on a fixed recurring schedule with a due date repeating on a specific date or specific day/month combination (e.g., property taxes being due the first day of April). The due dates for similar types of taxes will vary across governing bodies (i.e. different counties will have different property tax due dates).

Upon failure to remit the appropriate ꧃amount of a tax to the taxing authorities, various penalties may be incurred. Regar✨ding the various taxes mentioned above, tax penalties may include:

• A penalty assessment resulting in a one-time fee or charge.
• An interest assessment resulting in an escalating penalty based on the duration of the delinquency.
• A lien placed on underlying assets in the event the delinquent party should be unable to satisfy their debts.
• A denial of access or service for transaction-related taxes (e.g., tariffs).
• A seizure of company property or placement of a lien on the company property for business-related taxes.

The Bottom Line

There are many types of taxes that are applied in various ways. Understanding what triggers a tax situation can enable taxpayers to manage their finances to minimize the impact of taxes. Techniques that can help include 澳洲幸运5官方开奖结果体彩网:annual tax-loss harvesting to offset investment gains with investment losses, and 澳洲幸运5官方开奖结果体彩网:estate planning, which works t🥀o shelter inherited income for heirs.