Types of Taxes: A Complete Guide
As one of life’s inevitabilities, we can’t escape taxes. But knowledge is power. The more you know about taxes, the more likely you are to avoid paying more than necessary or making a mistake that could have the IRS knocking on your door. Whether you need to file taxes for yourself, your business, or both, it’s helpful to have a high-level understanding of the types of taxes you may encounter.
Take a look as we break down the types of taxes below, and be sure to reach out to your local credit union to take advantage of its tax-related perks, like special member-only discounts on tax preparation services.
Types of Taxes
Local, state, and federal governments levy taxes on income and profits to collect money to fund government-run goods, services, and programs. Nearly every country on Earth collects taxes. However, here, we speak specifically to the types of taxes in the USA. There are three overarching types of taxes: Income, property, and goods and services.
Income taxes are levied on the money you earn through work, investments, or inheritance. There are four types of income tax: federal, payroll, capital gains, and estate.
1. Federal income taxes
As the name suggests, federal income taxes are due annually to the nationwide federal government. Generally, employers must withhold federal income tax from employee paychecks for every pay period. Employees fill out Form W-4 at the start of employment so that the employer can determine the correct amount to withhold.
The Internal Revenue Service (IRS) oversees federal income tax, including the seven tax brackets that determine tax rates. Tax brackets are progressively divided by income range, meaning the higher your income, the higher your tax rate. Tax rates currently vary from 10% to 37%. However, the amount you ultimately pay will depend not just on your income but also on the number of deductions you make and the way you file.
There are four ways to file federal income tax:
- As a single filer. You are unmarried and filing individually.
- Married, filing jointly. You are married and choose to file your taxes together.
- Married, filing separately. You are married but choose to file your taxes separately. (Many married people who choose to file separately do so because one or both spouses qualify for a greater number of deductions as an individual.)
- As the head of household. You are unmarried and have at least one qualifying child or dependent.
Although extensions are possible, the standard federal income tax filing deadline is typically on or near April 15 each year, depending on if the date falls on a weekend or holiday.
2. Payroll taxes
Payroll taxes in the USA, or taxes paid on employee wages, go toward funding the federal social security and Medicare programs and, to a lesser degree, other state and local social insurance programs. (Governments fund Medicaid separately). Both the employer and the employee contribute 7.65% to payroll taxes, making a combined payroll tax rate of 15.3%.
Payroll taxes are not progressive like income taxes. The flat rate of 15.3% applies to all incomes. However, there is a wage base limit for the social security portion of payroll taxes, meaning wages above a certain threshold are not taxed. The current limit is $160,200.
If you are self-employed and make more than $400 a year, you will pay a self-employment tax that breaks down in the same fashion as the payroll tax:
- 12.4% for social security
- 2.9% for Medicare
3. Capital gains taxes
Capital gains taxes are levied on investment earnings at the time of sale. You must pay capital gains taxes within the same tax year as the investment sale. Your capital gains tax rate will depend on how long you held the assets.
Assets held for less than a year are considered short-term assets and are taxed at the same rate as your income tax. In contrast, assets held for longer than a year are subject to long-term capital gains taxes. Depending on your filing status and taxable income, your long-term capital gains tax rate can vary between 0%, 15%, or 20%.
Ultimately, the amount you will pay in capital gains taxes depends on more than the tax rate. It’s possible to reduce your capital gains tax rate by deducting investment losses (up to $3,000 a year), waiting until retirement, or tracking qualifying expenses that will reduce your taxable profit.
4. Estate taxes
Anything you own and intend to transfer to beneficiaries when you die can be subject to federal estate tax. This includes cash, real estate, insurance, retirement accounts, trusts, and other assets.
As of 2023, the threshold for federal taxation is $12.92 million for individuals and $25.84 million for married couples. This means that if your estate is below the threshold, it won’t be taxed at the federal level.
However, some states also levy an estate tax. As of 2023, Washington, D.C., and the following states have an estate tax:
- New York
- Rhode Island
There are two types of property taxes in the USA: real estate and property tax.
1. Real estate taxes
Other legally recognized entities, such as businesses that own homes, also pay real estate tax. The tax rate is determined by two factors: the location of the real estate and its estimated value.
2. Property taxes
Also known as personal property tax, property tax is often confused with real estate tax. The key difference between the two is that personal property taxes are levied on your property that isn’t permanent and is movable (such as a car, boat, or recreational vehicle). The personal property tax rate is assessed on the value of these items. Mobile homes are typically also classified under personal property tax and not real estate, although it can vary by jurisdiction.
Goods and Services Taxes
There are five types of goods and services taxes in the USA: sales, excise, sin, luxury taxes, and user fees.
1. Sales taxes
A sales tax is a consumption tax. State and local governments impose sales tax on the sale of goods and services. Businesses are responsible for collecting sales tax at the point of purchase and must remit the collected taxes to the government.
The sales tax rate you will pay varies by state. For example, Louisiana and Tennessee have the highest sales tax rates of 9.550% and 9.558%, respectively. On the other end of the spectrum, five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — have no state-levied sales tax. (Although Alaska does allow local sales tax.)
Online sales are also subject to sales tax, although not always. Generally, if the business from which you make a purchase has a physical location in your state, it will collect the appropriate sales tax.
2. Excise taxes
Excise taxes are levied on the sale of certain products within the United States. Excise taxes vary throughout the USA and can be imposed by the federal government, state or local municipalities. Who pays an excise tax depends on the state and varies between the consumer, retailer, or manufacturer. However, merchants most commonly pay these taxes and tend to indirectly pass the cost onto the consumer via higher prices.
Some examples of goods that are subject to excise taxes are:
- airline tickets
- indoor tanning
3. Sin taxes
Sin taxes are a form of excise tax. They are so named because sin taxes are levied on goods or activities commonly considered harmful to individuals or society. Examples include:
- soft drinks
4. Luxury taxes
Luxury taxes are another form of sales tax, imposed on expensive products or services that are deemed non-essential. These taxes are imposed as a percentage of cost over a certain price threshold. Purchases that may be subject to a luxury tax often include:
- high-cost vehicles
5. User fees/taxes
User fees are costs you pay to gain access to government-run services or facilities, such as toll roads, parks, waterways, and parking garages. They are termed user fees because, unlike many taxes where you may not directly benefit, user fees cover the use of services and facilities from which you benefit directly.
Further Resources on Types of Taxes
For more information on types of taxes, check out these resources:
- Lower your expenses. Learn all about available tax credits and deductions with this helpful guide from the IRS.
- Know where your money goes. The Tax Policy Center offers a breakdown of sources of revenue for the federal government.
- Learn the state-based specifics. Follow the link to each state’s department of revenue for location-based tax information.
The Power of the Credit Union Advantage
Now that you know all about the different types of taxes in the USA, you’re ready to prepare for tax season. While most credit unions don’t employ tax preparers, many do offer member-exclusive discounts on outside tax preparation services! Thanks to their member-driven focus, you’re also likely to receive helpful information on how to pay taxes, everything from accessing the proper tax forms to ways to get your refund faster. Use our Credit Union Locator Tool to find a credit union near you.