U.S. Supreme Court Justice Oliver Wendell Holmes once said, “Taxes are the price we pay for a civilized society.” One can argue about the extent and quality of the civilization that we receive for ourtax dollars, but it can’t be denied that we do pay a lot for it.
In the fiscal year that ended in October 2023, the United States government raised $4.439 trillion in taxes. A year earlier, that total was $4.9 trillion, some $457 billion more than 2023. The Treasury Department expects 168 million Americans to file tax returns in 2024.
There are many different kinds of taxes, most of which fall into a few basic categories: taxes on income, taxes on property, and taxes on goods and services.
Income Taxes
The United States is almost 250 years old, but the income tax didn’t come along until 1913. That’s when Congress passed the 16th Amendment to the Constitution. Before that, revenue was raised through excise taxes on particular items (such as whiskey and cigarettes) and tariffs on imported and domestic products.
In the 21st century, individual taxes are the most important source of revenue for the U.S. government. As of 2021, income tax was 42.1 % of total tax revenue:
The past decade has seen a vigorous tug-of-war over tax rates. The “Trump Tax Cuts” of 2017 lowered income tax rates for the wealthiest taxpayers and upped the standard deduction for married couples filing jointly to $27,000 (single filers $13,500) in 2023. This back-and-forth has been going on since the introduction of personal income tax in 1913 and appears certain to continue.
Payroll Taxes
In addition to federal income taxes, the U.S. government also mandates that employers subtractpayroll taxes from their workers’ paychecks each pay period, and then match the sums deducted. These payments are called FICA taxes because they are authorized by the Federal Insurance Contribution Act. Total FICA taxes on individual workers are 7.65% of income; 6.2% goes to fund the nation’sSocial Securitysystem, while 1.45$ goes to Medicare. Self-employed individuals are liable for the entire 15.3$, although one half of that amount can be taken as an above-the-line business deduction on a person’s income tax return.
Payroll taxes accounted for $1.3 trillion, or 32.5 % of federal revenues in 2021.
Capital Gains Taxes
Capital gains taxesare those paid on any profits made from the sale of an asset and are usually applied to home sales and stock and bond transactions. The capital gains tax rate for 2023 is 0%, 15% or 20%. Your rate depends on the amount of your taxable income. The higher your income, the higher your rate. Profits made from thesale of real estateare also subject to a capital gains tax. Single homeowners may exclude up to $250,000 of capital gain on the sale of a home, as long as the home was a principal residence for at least two of the five years before the sale; married couples filing jointly can exclude up to $500,000.
Estate & Inheritance Taxes
Estate taxescan be considerable, but less than 1/10 of 1% of taxpayers have to pay them, which means 99.9% of us don’t have to worry about this. The estate tax exempts the first $11.7 million for an individual and $23.4 million for a married couple. Estate taxes are imposed on the transfer of property upon the death of the owner. They were created to prevent the perpetuation of tax-free wealth within the country’s most affluent families. The maximum top estate tax rate is 40%. Many states also impose their own estate tax, sometimes known as an inheritance tax. Opponents of these types of taxes believe that they are an unfair confiscation of wealth passed on to an heir and call them “death taxes.” A tax related to the estate tax, and assessed in a similar manner, is thegift tax, levied on a transfer of wealth during a person’s lifetime. The first $15,000 of a gift is excluded from the tax.
Self-Employment Taxes
Self-employment tax is the equivalent of a payroll tax – covering required payments to Social Security and Medicare — for individuals who work for themselves. Social Security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
Self-employed workers calculate their SE Tax themselves. The self-employment tax rate is 15.3%, 12.4% for Social Security and 2.9% for Medicare.
Generally, you must pay SE tax and file Schedule SE (Form 1040 or 1040-SR) if either of the following applies:
- Your net earnings from self-employment were $400 or more.
- You work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes. You are subject to SE tax if you receive $108.28 or more in wages from the church or organization.
As a self-employed person, you may have to file Estimated Taxes each quarter. These payments will pay your self-employment tax.
Property Taxes
The government doesn’t just tax what you earn, they also tax what you own – especially if you own your own home or any other type of real estate.
The property tax is levied on land and buildings as well as tangible personal property like vehicles and equipment. Property taxes are the largest source of revenue for cities and states and are used to fund schools, roads, police, firefighters, and other services.
Property Taxes
Property tax, sometimes known as an ad valorem tax, is imposed on thevalue of real estateor other personal property. Property taxes are usually imposed by local governments and charged on a recurring basis. For example, homeowners will generally pay their real estate taxes either once a year or monthly as part of their mortgage payments. Often, this is the primary way for local governments and school districts to fund themselves.
Real Estate Taxes
Real estate taxesare often subject to fluctuation based upon a jurisdiction’s assessment of the worth of a property That value is based on its condition, location, and market value, and/or changes to the amounts apportioned to various recipients of the tax. For example, if residents of a community have voted to increase the millage rate (the amount per $1,000 that is used to calculate taxes) for a school system, homeowners could see an increase in the tax levied on their properties. Conversely, if property values have fallen due to adverse economic circ*mstances, home taxes may decrease.
Tangible Personal Property Taxes (TPP)
“Real estate” is a commonly used phrase, but its definition is more literal than is commonly known. “Real” refers to actual land. In contrast, “tangible” property refers to items that can be moved. TPP can include automobiles, boats, recreational vehicles, and aircraft.
Some states also tax other types of business property such as factories, wharves, etc. In addition, items that don’t fit other categories can be considered TPP, including jewelry and toys, or furniture used in a rental property.
Wealth Taxes
Accumulated wealth becomes its own specific kind of property. It can generate revenue, through interest, just by existing, and it can improve access to credit for purchases small and large. While there has been much talk lately about creating wealth taxes in the United States, so far it is mostly in the campaign speeches of progressive candidates.
Other countries, including France and Spain, tax wealth based on the market value of a person’s assets. These taxes are typically progressive, meaning rates are higher on larger amounts of wealth. Jeff Bezos would pay more than Taylor Swift (so far!).
Taxes on Goods and Services
With taxes on what you earn and what you own, the next method for raising revenue is taxing what you do. Often that means the transactions where you buy the things you own with the money you have earned.
Sales Tax
Thesales taxis most often used as a method for states and local governments to raise revenue. Purchases made at the retail level are taxed as a percentage of the sales price of a particular item. Rates vary widely between jurisdictions with 45 states and the District of Columbia collecting sales tax. Southern states like Tennessee (9.55%), Louisiana (9.55%), Arkansas (9.44%) and Alabama (9.24%) have the top combined state and average local sales tax rate. Washington State is in that group at 9.4%.
Local sales tax, typically administered by a city or county, is collected in 38 states. Believe it or not, the top combined city and state sales taxes is the 12.95% that’s paid in Sterlington and Monroe, two Louisiana towns. Places like Chicago (11.5%), Los Angeles (10.5%) and New York (8.875%) are not even in the top 30 local tax leaders.
It’s worth noting that taxes also vary on the type of item bought. For example, a pair of shoes may be taxed at one rate, restaurant food at another, while some items, like staple commodities bought at a grocery store, may not be taxed at all. Also, the same shoes may be taxed at a different rate if sold in a different state or county.
Some believe that sales taxes are the most equitable form of taxation, since they are essentially voluntary, and those who consume more, pay more. Others believe that they are the mostregressiveform of taxation, since poorer people wind up paying a larger portion of their income in sales taxes than wealthier people.
Excise Taxes
An excise tax is based on the quantity of an item rather than on its value. For example, the federal government imposes an excise tax of 18.3 cents on every gallon of gas purchased, regardless of the price charged by the seller. States often add an additional excise tax on each gallon of fuel.
Excise taxes have been part of the American story since the beginning. It was an excise tax on distilled spirits that sparked the Whiskey Rebellion in 1791. It took three years for the government to end that episode.
Other Purchase Taxes
User feesare taxes that are assessed on a wide variety of services, including airline tickets, rental cars, toll roads, utilities, hotel rooms, licenses, financial transactions, and many others. Depending upon where someone lives, a cellphone, for example, may have as many as six separate user taxes, running up the monthly bill by as much as 24.5%.
Sin taxes are so-called because they are used not merely to raise revenue, but also to offset the cost of paying for the damage the taxed items cause. It is essentially a way to discourage people from smoking tobacco and marijuana, vaping, drinking alcohol, and gambling.
Sin taxesare imposed on items like cigarettes and alcohol.For example, the cigarette tax in Connecticut and New York is $4.35 per pack, highest in the nation. In Georgia, the same tax is 37 cents a pack, in Missouri just 17 cents.
The City of Philadelphia placed a tax on soda and other sugary beverages of 1.5 cents per ounce. Delaware has no general sales tax but takes in $147 per capita each year with taxes on tobacco and alcohol. While data can be unreliable because legal marijuana is still relatively new and regulation is evolving, California took in $877.4 million in tax revenue in fiscal year 2022.
You are unlikely to run into significant luxury taxes in the United States. A 1991 federal law that placed taxes on expensive vehicles, from automobiles to yachts, and on expensive jewelry, was repealed in 1993.
Canada and Australia are examples of countries that do place higher taxes on higher priced, “luxury” goods. In the U.S., you may run into a luxury tax if you buy a co*cktail in a casino.
More Information on Taxes
Complete knowledge of all aspects of taxation makes you a certified public accountant. For us non-CPAs, it helps to have articles focused on the topic you need. Fortunately, you have access to plenty of tax advice right here, including:
- Tax brackets
- How to settle tax debt
- Tax debt relief options
