What Are Taxes?
Taxes are mandatory contributions levied on individuals
or corporations by a government entity—whether local, regional,
or national. finance government activities, including public works
and services such as roads and schools, or programs such as
Social Security and Medicare.
In economics, taxes fall on whether this is the entity being taxed,
such as a business, or the end consumers of the business’s
goods. From an accounting perspective, there are various taxes
to consider, including payroll taxes, federal and state income
taxes, and sales taxes.
Understanding Taxes
To help fund public works and services—and to build and
maintain the used in a country—a government usually taxes its
individual and corporate residents. The tax collected is used for
the betterment of the 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.
The money could be income earned from salary, from
investment appreciation, or received as additional income,
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 and .1 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.2
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—the
deliberate failure to pay one’s full tax liabilities—is punishable by
law. (On the other hand, actions taken to lessen your tax liability
and maximize after-tax income—is perfectly legal.)3
Most governments use an agency or department to collect taxes.
In the United States, this function is performed federally by
the (IRS).4
Types of Taxes
There are several very common types of taxes:
● a percentage of generated income that is relinquished to the
state or federal government
● 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
● a percentage of corporate profits taken as tax by the
government to fund federal programs
● taxes levied on certain goods and services; varies by
jurisdiction
● based on the value of land and property assets
—taxes on imported goods; imposed with the aim of
strengthening domestic businesses
● rate applied to the (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 income or 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.5
Income Tax
Like many nations, the United States has a 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 6
A variety of factors affect the marginal tax rate that a taxpayer will
pay, including their filing status, or Which status a person files in
how much they are taxed. The source of a taxpayer’s income
also makes a difference in taxation.7 It’s important to learn the
terminology of the different income types that may affect how
income is taxed.
are of particular relevance for investors. Levied and enforced at
the federal level, these are taxes on the profit generated when
you sell an that's increased in value.8
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.8 should be
maintained to substantiate the length of ownership when both the
assets were sold and the tax return was 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 2022, employees
pay 1.45% into Medicare on all wages and 6.2% into Social
Security on the first $147,000 earned.
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).12
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.13 A self-employed individual must pay the
equivalent of both the employee and employer portion of payroll
taxes through, which also fund Social Security and Medicare.14
Corporate Taxes
Corporate taxes are paid on a company’s taxable income. The
steps to calculate a company’s taxable income are:
● Sales revenue - (COGS)=
● Gross profit - such as (G&A), selling and
marketing, (R&D), depreciation, etc. = earnings before
interest and taxes (EBIT) EBIT - interest expense = taxable
income
The corporate tax rate in the United States is currently a flat rate
of 21%. Before the Tax Cuts and Jobs Act (TCJA) of 2017, the
corporate tax rate was 35%.
Sales Taxes
Sales taxes are charged at the point of sale when a customer
executes the payment for a good or service. The business
collects 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.18
In 2021, the highest average state and local sales tax rate was
found in Tennessee, at 9.55%. 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.18
Property Taxes
A common property tax in the United States is the real estate ad
valorem tax. A 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.19
Property tax rates vary considerably by jurisdiction and many
states also tax, such as cars and boats.20
In FY 2018, the state with the highest property tax collections
was New Jersey at $3,378. (The District of Columbia would rank
higher if it was counted with the 50 states, at $3,740 per capita.)
The lowest state ranking was $598 per capita in Alabama.21
Tariffs
A tariff is a tax imposed by one country on the goods and
services from another country. The purpose is to encourage
domestic purchases by increasing 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).22
Tariffs are politically divisive, with debate over whether the
policies work as intended.22
Estate Taxes
Estate taxes are levied only on that exceed the exclusion limit
set by law. In 2022, Surviving spouses are exempt from estate
taxes.23
The estate tax due is the taxable estate minus the exclusion limit.
For example, a $14.7 million estate would owe estate taxes on
$2.64 million.
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.24
States may have lower exclusion limits than the federal
government, but no state taxes estates worth less than $1 million.
Massachusetts and Oregon have the $1 million exemption
limits.2526 State rates are also different from the federal rate. In
2021, the highest state estate tax rate, implemented in Hawaii
and Washington, was 20%.27
Some states levy their own additional estate or inheritance tax,
with exclusion limits that differ from those of the federal
government.27
Estate taxes are different from inheritance taxes in that an estate
tax is applied before assets are disbursed to any beneficiaries.
An inheritance tax is paid by the beneficiary. There is no federal
inheritance tax, and, as of 2021, only six states have an
inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New
Jersey, and Pennsylvania.27
Tax Delinquency
Every type of tax has a different due date or reporting
requirement. Some are collected immediately 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
(i.e. 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. Regarding 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
(i.e. tariffs).
● A seizure of company property or placement of a lien on the
company property for business-related taxes.
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