Taxes play a big role in funding government operations and public services in the United States. According to the official website of Fiscal Data, the number one revenue of the United States is tax that is paid by individuals, small businesses, and corporations. In FY 2024, individual income taxes will contribute 50% of the total revenue. It is followed by Social Security and Medicare taxes that have contributed 35%. In the same website, it is stated that the combined contribution of individual and corporate income taxes is $2.45 T in FY 2024. It makes up 60% of total revenue.
Talking about taxes in the United States, as someone who is from outside the country or someone from the country who is not really familiar with taxes, you may want to know how many different kinds of taxes the country has and what they are. Fortunately, you are here where you will be able to find the main types of taxes in the United States.
Definition of Tax
Before talking about the different kinds of taxes in the United States, it is better for you to learn about taxes in general first. Check out definitions of taxes according to some experts and dictionaries below:
- Edwin R.A. Seligman: “Compulsory contribution from the person, to the government to defray the expenses incurred in the common interest of all, without reference to special benefit conferred.”
- Philip E. Taylor: “A compulsory contribution from the person, to the government to defray the expenses incurred in the common interest of all, with little reference to special benefit conferred.”
- Hugh Dalton: “A compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the taxpayer in return, and not imposed as penalty for any legal offence.”
- Adam Smith: “A compulsory payment levied by the government on individuals or companies to meet the expenditure which is required for public welfare.”
- Oxford English Dictionary (OED): “A compulsory contribution to state revenue, levied by the government on workers’ income, business profits, or added to the cost of some goods, services, and transactions.”
- Oxford Learners Dictionaries: “Money that you have to pay to the government so that it can pay for public services. People pay tax according to their income and businesses pay tax according to their profits. Tax is also often paid on goods and services.”
- Cambridge Dictionary: “(An amount of) money paid to the government that is based on your income or the cost of goods or services you have bought.”
- Merriam Webster Dictionary: “A charge usually of money imposed by authority on persons or property for public purposes.”; “A sum levied on members of an organization to defray expenses.”
- Investopedia: “Mandatory contributions levied on individuals or corporations by a government entity – whether local, regional, or national.”
- Encyclopedia Britannica: “A financial charge or levy imposed by a government upon an individual or a legal entity. A failure to pay, or evasion of or resistance to taxation, is punishable by law.”
Types of Taxes in the United States
The United States have some different kinds of taxes, such as:
1. Income tax
Individual income tax, personal income tax, or just income tax is the kind of tax that should be paid by an individual in the United States. This one is one of the main sources of revenue for the country. The money paid by the individuals will go to the general U.S. Treasury fund. If you are an employee who is working for a company, your salary will usually be cut for this tax. As for self-employed individuals or those who work as independent contractors, you will have to report and pay the tax yourself.
Income taxes in the United States are usually collected on a federal level and by some state and local governments. On a federal level, these taxes can be increased if the income of the taxpayers also increases. As for on the state level, the rates and structure can be different from one state to another. Talking about income taxes, it should be noted that there are some people who do not have to pay for them because a lot of exemptions and deductions are available.
2. Corporate income taxes
Corporate income taxes are the types of taxes that are levied on the profits of businesses by federal and state governments. They are revenues minus costs of doing business. Just like in some other countries, the rates of this tax are lower than 30% because it has a negative impact on the economy.
3. Payroll taxes
Payroll taxes are defined as taxes that are paid by the employees based on their salaries to finance social insurance programs. FICA are some of the kinds of taxes under payroll. They are called FICA taxes because they are authorized by the Federal Insurance Contribution Act. In the United States, total FICA taxes are 7.65% of income, of which 6.2% of them goes to fund Social Security and $1.45 for Medicare, according to Debt.org.
4. Self-employment taxes
Self-employment taxes are similar to payroll taxes. The only thing that sets it from payroll taxes is that it is for individuals who work for themselves. Its tax rate is 15.3%, with 12.4% for Social Security and the rest for Medicare. By paying these taxes, these individuals will be able to get a number of benefits, including hospital insurance (Medicare) benefits, retirement benefits, disability benefits, and survivor benefits.
5. Capital gains tax
Capital gains tax is a kind of tax that is imposed on profits made from the sale of investments, including real estate, bonds, businesses, and stocks. Bear in mind that this tax only applies to profits made from the sale of assets that have been owned for more than a year. It is called long-term capital gains. As for everything held for less than a year, it is known as short-term gains. Unlike the long-term capital gains that are taxed at preferential rates, these things are taxed as ordinary income.
In case your investment is sold for less than you purchased it for, you can reduce capital gains with capital losses incurred in that year. Apparently, the amount of capital gains tax depends on your total long-term capital gains minus capital losses. It varies based on your tax bracket, ranging from zero, 15%, or 20%.
6. Property taxes
Property taxes, which are also popular as ad valorem taxes, are imposed by state and local governments to those with property, including land and buildings. The amount that should be paid varies, depending on the overall value of the property. The money collected from this tax is usually used to fund local and state governments, transportation, education, recreation, and many more.
7. Inheritance taxes
Inheritance tax applies to the thing that is passed on after the passing of an individual. It can be an asset or money. The one that must pay for this tax is the person that inherits it. For the amount that has to be paid, it depends on how much the thing that is inherited and the relationship the one who receives it with the deceased. As for spouses, they do not have to pay for such a tax.
8. Gift taxes
Gift tax is counted as federal tax. This one has to be paid by someone who gives money or other valuable assets worth at least $18,000 as a gift to someone else. Apart from that, this kind of tax also has to be paid by someone who sells something less than its fair market value.
9. Tangible personal property taxes
Tangible personal property or TPP is described as property that is able to be moved or touched. It includes furniture, inventory, machinery, business equipment, boats, aircraft, recreational vehicles, and automobiles. Factories, wharves, jewelries, toys, and so on can also be counted as TPP.
10. Wealth taxes
As wealth can generate revenue through interest and can improve access to credit for purchases, those with it should pay wealth taxes every year. For your information, these taxes are progressive, meaning those with more wealth will have to pay more.
11. Sales taxes
Sales taxes are imposed by state and local governments on the sale of goods and services you buy. At the federal level, there is no such thing called sales tax. It has another name, which is a consumption tax. It is usually able to be seen on the receipts. For the rates, they vary depending on the type of sale and location.
12. Excise taxes
Excise tax refers to a tax that is imposed on certain goods or activities to discourage their consumption or to earn revenue for certain purposes. It usually has to be paid along with consumption tax. The examples of goods that have this kind of tax include alcohol, cigarettes, gasoline, soda, fuel, airfare, betting, and telecommunications services. Sometimes, it also uses the term “sin tax” in case of products or activities that are considered harmful to the public, such as tobacco, alcohol, gambling, sugary drinks, and indoor tanning.
13. Custom duties
In the United States, custom duties, which are also known as tariffs, are imposed on imports of goods. These things are paid by the importer at the time of the import. The amount varies, depending on the country of origin and product. It is possible for a good to be exempted from this tax if it is from a country that has an agreement.
14. Licenses and occupational taxes
Those who provide professional or personal services have to pay taxes known as licenses and occupational taxes. These persons include attorneys, doctors, dentists, accountants, barbers, casinos, plumbers, auto mechanics, and stockbrokers. They are required to pay these things because they have the privilege of carrying on a certain business or maintaining a certain professional certification. These taxes will usually have to be paid every year. As for the amount, it varies, depending on a few things such as the percentage of revenue, the total of practitioners in the firm, and so on.
Aside from the taxes mentioned above, there is also a thing called a vehicle license fee. Basically, those who have vehicles have to pay taxes every year or twice a year. No one with a vehicle can escape from this tax as it is imposed in every state in the United States. Additionally, a fee for a driver’s license is also imposed.
15. Tax administration
In the United States, taxes are administered by a lot of tax authorities. There are a total of three tax administrations at the federal level, including the Internal Revenue Service that administers most domestic federal taxes, the Alcohol and Tobacco Tax and Trade Bureau or TTB that administers alcohol, tobacco, and firearms taxes, and the U.S. Customs and Border Protection of CBP that administers taxes on imports. Both the Internal Revenue Service and the Alcohol and Tobacco Tax and Trade Bureau or TTB are parts of the Department of the Treasury. As for the U.S. Customs and Border Protection or CBP, it is under the Department of Homeland Security. For those who are wondering about the organizations of state and local tax administrations, they vary.
Bottom Line
In conclusion, there are several kinds of taxes in the United States, including income tax, corporate income tax, payroll tax, self-employment tax, capital gains tax, property tax, inheritance tax, gift tax, tangible personal property tax, wealth tax, sales tax, excise tax, custom duties, license and occupational taxes, tax administration, and so on. They target various income sources and economics. If you have a business or just a common individual, it is important for you to understand the different kinds of taxes to navigate financial responsibilities and to ensure that you can follow the federal, state, and local tax laws.
