Every aspect of our lives is affected by taxes. The government imposes duties on our paychecks, the products we buy, and the services we consume. We also pay taxes on our properties, cars, investments, and whatever assets we inherit from loved ones. Naturally, the US tax system is complex, to say the least, but that doesn’t give you an excuse to feign ignorance.
Understanding Taxes on Revenues
Learning the basics about the different taxes that you are subject to is valuable in financial planning. Here’s a breakdown of levies by revenue type.
Federal Income Tax
The federal income tax applies to wages, earnings, and other income. It’s a progressive tax applied in brackets and collected over the course of the year. Most people pay more than they should and receive a refund after filling in their income tax return each year.
Did you know that the US applies taxes on winnings, too? That’s right – whether you win cash or a car when playing the lottery, bingo, poker, or visit the , you will need to pay taxes on it.
Alternative Minimum Tax (AMT)
This tax works alongside the regular system and applies to certain kinds of income or wealth like stock options. You will need to pay an AMT if you own more than a certain amount ($75,000 for singles and $118,100 if you’re married and filing together.)
State and Local Income Taxes
Most states in the US have their own income tax structure for residents as well as people who work there. Most employ a progressive tax system. The seven states that do tax income are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
FICA Tax
In addition to income taxes, employees pay a FICA tax which funds Social Security (6.2%) and Medicare (1.45%). An employer also contributes an equal amount to every employee. In addition, single filers earning more than $200,000 and joint filers earning more than $250,000 pay a Medicare surtax of 0.9%.
Self-Employment Tax
People who are self-employed make quarterly payments to the IRS instead of paying their income taxes out of their paychecks. They will also pay into SECA, which covers Social Security and Medicare, both the employee and employer portions.
Capital Gains Tax
Capital gains tax applies to net profit when selling assets like real estate, cryptocurrency, valuables, or investments. The rate depends on the length of ownership.
Estate Tax
The government imposes a tax on estates worth at least $12.06 million, which covers everything passed on upon death, like cash, investments, and real estate. Some states have their own estate taxes with different exemptions.
Inheritance Tax
Inheritance tax also occurs when someone dies and passes something of value on, but it’s the person receiving the money or assets who must pay. Most of the time, spouses are exempt from this tax.
Gift Tax
When someone gives money or anything of value worth $15,000 or more, they must pay a gift tax. This particular tax works in conjunction with the estate tax, and there are exemptions involved.
Generation-Skipping Transfer Tax
This tax applies to gifts to a grandchild or someone unrelated more than 37.5 years younger. The exemptions are similar to that of the annual and lifetime gift tax exclusions.
Why Is It Important to Pay Taxes?
The government collects taxes and distributes the funds to agencies responsible for national defense, Social Security, education, national parks, welfare, and more. Without a proper tax system in place, the country will not have adequate money to take care of its people. Think of that the next time you feel the burden of taxes!
