Did you know that by law everyone has to file an income tax return every year to determine what their tax obligations are? If you are a new taxpayer because you recently joined the workforce, this is a great time to become knowledgeable of the different types of income tax.
Keep reading to learn the ins and outs of income tax lingo.
1. Individual Income Tax
Another name for individual income tax is the personal income tax. This tax is charged to a person based on their wages, salaries, and other types of income. Usually, this is a tax charged by the state.
Most people do not pay taxes on every single penny they earn because of different exemptions, credits, and deductions that they qualify for. There are quite a few credits and deductions that the IRS offers to help reduce the income that is taxable.
For example, there are deductions for healthcare expenses, education expenses, and investments. Using a professional company like Clickandmortaraccounting.com will help you take advantage of any credits and deductions that you are entitled to take.
2. State and Local Income Tax
Most states in the United States have personal income taxes they charge as well. Currently, there are only seven states that do not charge a state income tax which include: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. The two states that do not tax you on earned income, only on tax investment income and interest are New Hampshire and Tennessee.
New Hampshire and Tennessee are both working to eliminate taxes on investment income and interest. There are also other states working on eliminating income taxes in the coming years.
Just because there are no income taxes in certain states does not mean that it is cheaper to live in those states. Usually, states that do not levy state taxes make up for this with other taxes.
3. Business Income Tax
A business is not exempt from paying taxes on what they earn. The IRS taxes income on self-employed contractors, corporations, partnerships, and small businesses. The owners or the shareholders of the business have to report the business income and deduct the operating expenses and the capital expenses.
The difference between the business income and the expenses is the income that can be taxed by law in most cases.
4. Capital Gains Taxes
These taxes are paid based on any profits that are made when selling an asset like a stock, a bond, or real estate. Currently, single homeowners can exclude up to $250,000 of the capital gain when they sell a home as long as the home was the main residence for at least two years before the sale occurred. Married couples that file together can exclude up to $500,000.
5. Estate Taxes
Estate taxes are charged on the transfer of property when the owner dies. This was originally created to prevent tax-free wealth for the country’s wealthiest families. This specific tax exempts the first $5.42 million of an estate’s worth, which means that only 1% of the population is affected.
The maximum estate tax rate is 40% and many states charge their own estate tax which is called an inheritance tax in certain states.
6. Real Estate Taxes
Real estate taxes can fluctuate based on the assessment of the property’s worth based on the jurisdiction that the property is in. This worth will vary based on the market value, the home’s condition, and the location. If the property value in the area decreases due to the economy then the real estate taxes might also decrease.
Boats, recreational vehicles, and automobiles might also be subject to a property tax, depending on the area you live in.
7. Property Taxes
This tax is charged on the value of the real estate or other personal property. Local governments charge property taxes and they charge it on a recurring basis either annually or monthly. In some instances, the taxes are added to their mortgage payments to break up the payment into smaller amounts.
8. Sales Tax
This type of tax is one way that states and local governments raise their revenue to invest back into the state. The purchases that are made at the retail level are charged a percentage of the sales price. The percentage varies by state and county and some items might be taxed differently within the same area.
For example, a 6% sales tax might be charged on clothing, and a 0% sales tax is charged on food. Keep in mind that the more you buy and consume the more you will pay in sales taxes on the items that you purchase.
Some areas also charge sin taxes on items like alcohol and cigarettes or luxury taxes on items like jewelry and expensive vehicles. Once again the sales taxes will vary from place to place depending on the local jurisdiction.
As of the writing of this article, the state of New Hampshire and Nevada does not charge sales tax on items.
Now You Know the Different Types of Income Tax
As you can see there is more than one type of tax. Now that you are familiar with the different types of income tax and tax lingo you can now understand your accountant in the future. If you are feeling totally lost in the world of taxes it might be a good idea to hire a financial advisor that will be able to assist you.
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