It’s said that there are two unavoidable things in life: death and taxes. While we can’t dodge that first one, there are certainly many people who try to reduce the pain of paying of taxes. This guide defines the taxes that most Americans will pay in their lifetimes and what they encompass.
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Taxes on Income & Business
1. Payroll Tax
This tax is generally a percentage deducted from the paychecks of staff (full and part time employees). These taxes include two parts:
- Deductions, also known as Withholding Tax. These cover an employee’s required contributions to federal and state incomes taxes, local taxes, FICA (short for Federal Insurance Contributions Act) for social security and Medicare, unemployment and disability insurance. This also includes voluntary deductions that an employee chooses, such as contributing to a Flex account.
- Taxes related to the employer’s cost of employing a person, such as contributing to the employer’s healthcare insurance costs.
2. Alternative Minimum Tax (AMT)
This supplemental income tax was established by Congress in 1969 in order to ensure that wealthy households avoid loopholes and pay more tax. It applies to individuals, corporations, estates and trusts that apply for certain benefits or exemptions. As of the American Taxpayer Relief Act of 2012, the AMT is now tied to inflation to ensure that middle class families are not impacted too harshly by the AMT.
3. Estate Tax (Federal)
According to the IRS, this is a tax on a person’s right to transfer property at the time of their death. The tax takes into account everything a person owns or is invested in at the time of death, including cash, securities, real estate, insurance, assets and more. This is called the “gross estate” and only a few deductions are allowed (such as funeral expenses). A certain amount is exempted by law depending on the year of the death. The current exemption rate for 2016 is $5.45 million, with a top tax rate of 40%. Any amount inherited above that rate is liable to the estate tax. Portability is when the unused exclusion is transferred to a surviving spouse and can be used against that tax liability as well.
4. Estate Tax (State)
The Tax Foundation reports that more than a dozen states have also have their own estate tax, which can range as high as 20% in Washington State. Exemptions sometimes exist for this too but the estate tax assets range is lower than federal, currently ranging from $675,000 to $2 million.
5. Inheritance Tax
This is a state tax only in effect in a few states levied on those who inherit property or income from someone living or owning property in those states, outside or their own spouse. The amount and availability of deductions depends on the relationship of the deceased to the inheritor. This is different from the estate tax listed above (New Jersey and Maryland have both). Each state has different regulations so check your state.
6. Federal Gift Tax
Similar to the estate tax, this applies to transfer of property from a living person, without getting something in return such as compensation or consideration. Portability can apply to this as well. This tax is paid by the giver rather than the recipient. The IRS specifies this does not apply to certain gifts such as donations to a political organization, tuition, medical expenses or gifts to a spouse. Gift taxes apply when a donor gives more than $14,000 per recipient in a calendar year for 2016.
7. Self-Employment Taxes
The IRS and certain states require those who are self employed as a sole proprietor, an LLC with a single owner or as an independent contractor to pay the following taxes:
- Income tax: If the net losses or expenses are less than the net profit, self-employed individuals will need to report that difference as income. You must report income over $400 and possibly less.
- Self-employment tax: These quarterly taxes are used for Social Security and Medicare contributions.
- State income tax, if applicable.
8. Taxes for Other Small Businesses
Depending on whether the business is a partnership, corporation, S-Corporation or an LLC with multiple partners or shareholders, you will need to file federal income tax and self-employment taxes, and possibly estimated tax. Owners will also need to file state income tax, where applicable.
9. Affiliate Income Tax
Affiliate income earned from any outlet is considered taxable income.
Numerous state rules apply determining who must pay and when, including whether a nexus applies as well.
10. Rental Income
The IRS requires filing on rental income, however it allows a number of deductions for expenses, such as mortgage interest, property tax and operating expenses. Reporting goes on the annual income tax form. Additionally, state taxes may apply from the state that the rental property is located.
11. Tax on Prizes
Any merchandise, property, trips or cash that a person wins are subject to federal taxes, and must be filed on your annual form as “additional income.” Additionally, winters will have to report that income in applicable states.
Taxes on Purchases
12. Sales Tax
Sales tax is collected on most tangible items that are purchased, however it can also apply to consulting services and downloadable software, SaaS and cloud computing services as well. Sales tax is figured as a percentage of the item taxed and is set by local governments and states that collect tax. It is paid by the buyer at the time of purchase and remitted by the retailer.
13. Use Tax
Frequently collected by states that have a sales tax, a use tax is collected on goods bought out of state, paid by the purchaser. Use taxes are not enforced by states as rigorously as sales tax. Laws have changed in recent years, and now some states require the retailer to pay uncollected tax for online purchases if they a nexus exists for the retailer.
14. Excise Tax
Excise tax is similar to a sales tax, but it only applies to specific goods such as luxury items and fuel, or goods linked to health issues, such as cigarettes or alcohol.
15. Capital Gains Tax
A capital gain is defined as a profit made from the sales of an asset (property, home, furnishings, stocks and bonds, etc.) minus the amount you paid for it – which includes all costs, including taxes, shipping, installation, home improvement etc. However, the sale of homes is most often exempt from capital gains taxes, according to Investopedia.
16. Alimony Tax
Alimony is deductible for the payee and taxable for the recipient. (However, child support is not considered taxable income and therefore, not deductible either.)
17. Property taxes
Annual property taxes are collected by states and local governments based on the appraised value of a property. They include:
Taxes on Investments & Savings
18. Tax on Interest and Dividends
Generally interest earned is filed as income on the federal tax return. It includes interest on bank accounts, dividends, interest on loans someone gives out and more. Some forms of interest may be exempt, including interest from certain bonds.
19. Tax on IRAs
Contributions to traditional IRAs are tax deductible but when that income is distributed, it is taxable by the IRS. According to the Wall Street Journal, some distributions are not taxed even in a state with taxes. This is not the case for Roth IRAs, however those contributions are not reported on tax returns. Additionally, some Roth IRA distributions are not subject to tax.
20. Individual Shared Responsibility Payment
This is a fee assessed on households for any month a taxpayer or any of his or her dependents do not have minimal essential health insurance if it is deemed you can afford coverage. The fee is either a percentage of household income or per person, whichever is higher and is paid when taxpayers file their Federal income tax returns. See Healthcare.gov to learn more. (Note: This no longer applies as of 2019.)
As an American, will you eventually pay all of these taxes? It’s possible, but most people won’t. If you never own a home or car, you won’t pay property taxes. You won’t have self-employment taxes if you’re not an entrepreneur. Only those who are divorced have the possibility of alimony tax. But I’m willing to bet there are some people who’ve paid every single one of these kinds of taxes across a lifetime.