Benjamin Franklin, one of the United States’ founding fathers, famously said “in this world nothing can be said to be certain, except death and taxes.” Essentially, death and taxes are two events that are practically inevitable. However, this article will only cover taxes!
There are four key types of taxes that are imposed on various areas of our economy: sales tax, property tax, corporate/business tax, and income tax.
Sales Tax
Take a minute to think back to your last shopping trip — the grocery store, an online store, or even your favorite clothing store. Now, think about that item in your cart that costs $20, but when you get to checkout, it costs $22. Where did the extra two dollars come from?
Sales tax is a fee collected by a government on the transaction of goods and/or services. This is the reason why the price of an item at checkout cost more than it does when you initially pick it up.
Sales tax is usually collected by state and local governments to fund fire and police departments, schools, and roads. Also, sales tax percentages may very based on city and state.
Property Tax
If you own a home or a piece of land, chances are that you’ve paid or will pay property taxes.
Property taxes is a fee collected by a government on the value of real estate. For example, a city may place a 5% tax on all real estate. This means, that you would pay $5,000 annually on a property worth $100,000.
Similar to sales tax, property taxes are used to fund fire and police departments, schools, and roads among many other activities.
Corporate/Business Tax
Corporations are legal entities that are owned by investors called shareholders. Apple, Amazon, and Verizon are a few examples of corporations.
Corporations pay “corporate income tax” which is a percentage imposed on the amount of profit earned. As of this writing, the current federal corporate income tax rate is 21%. However, some states do impose a state corporate income tax rate in addition to federal corporate income taxes.
Unlike sales and property taxes, corporations can deduct certain expenses, or get tax credits, to lower their tax bill. For example, ABC Company makes $100,000 in profit. Without a tax credit, the company would pay $21,000 (21% of $100,000) in federal corporate income taxes. However, the company gets a $5,000 tax credit for installing solar panels on their building, lowering their tax bill to just $16,000.
Income Tax
If you’ve ever worked a job, it is likely that you’ve paid income taxes, which is a fee collected by a government for the money you earn.
The federal government’s main source of revenue is income taxes. Some states and local governments also collect income taxes.
The federal government uses a progressive income tax system, meaning you are taxed at a higher rate when you earn more money.
Let’s use an example. John makes $100,000 in his job as a sales representative. By looking at the tax brackets above, you may think that John would pay 24% of his income to the federal government. However, that is not the case.
The first $9,525 he earns would be taxed at 10%, equating to $952.
The next $29,175 he earns would be taxed at 12%, equating to $3,501.
The next $43,800 he earns would be taxes at 22%, equating to $9,636.
The next $17,500 he earns would be taxed at 24%, equating to $4,200.
This brings his total tax payment, before deductions to $18,289 for an effective tax rate of 18%, instead of 24%.
The federal government allows taxpayers to deduct a certain amount of money automatically from their taxes, known as the standard deduction. For those with more deductible expenses, they can complete itemized deductions.
Closing
This article covered four main types of taxes: sales tax, property tax, corporate/business tax, and income tax.
While taxes may not be the most enjoyable activity, they keep our roads in good shape and our economy moving!
This guide should be used for informational purposes. Contact a certified tax planner for more detailed advice.
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