As you know, the only certainties in life are death and taxes. What you might not be certain of is how much of your income is going to Uncle Sam.
In this article, we’ll review the three main categories of taxes – income, investment, and goods and services, and conclude with some brief tips to minimize your tax burden.
The most significant tax most people pay is on their income.
Types of Income Taxes
The federal government, 41 states, and a handful of municipalities all take a portion of your income. These tax rates are progressive, meaning that the higher your income, the higher your tax bill.
Federal income tax rates range from 10 to 37%, and state taxes can be as high as 11%. Nine states have zero income tax, which is a relief. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are on this list.
Because these taxes are levied on your overall income, it can be helpful to do a Google search for “taxes help near me” to find a professional. Or, keep reading to learn how you can get a free analysis from a tax expert.
Employers automatically deduct a percentage of your compensation, which they then have to match. These funds are FICA payments, short for Federal Insurance Contribution Act. The proceeds of these payments go to fund Social Security and Medicare.
If you’re self-employed, you’re on the hook for the entire amount (15.3%) because you don’t have the benefit of an employer footing half the bill.
Capital Gains Taxes
These taxes are collected on income from profitable investments, such as selling a home, stocks, or bonds. There are also taxes interest income. Your overall income determines your capital gains tax amount. The range is from 0 to 20%.
99.9% of Americans don’t have to pay estate taxes, but you should know about them. These taxes are incurred when ownership of an estate transfers due to death. The goal of estate taxes is to prevent the “unjust” accumulation and concentration of wealth among powerful families that have had the advantage of being able to amass an empire over generations.
The maximum estate tax is 40%, and the first $11.7 million of an estate’s value is exempt from taxation. This exemption doubles for married couples.
If you own property, be prepared to pay taxes on it.
Homeowners have to pay a percentage of its value each year. In general, this tax is bundled with your mortgage payment. The amount you’ll pay is based not only on your home’s value (hence the term “ad valorem,” which translates to “according to value”) and the city in which you live.
Personal Property Taxes
In addition to the taxes you pay on your home or investment property, you could also pay taxes on transportation items like boats, automobiles, recreational vehicles, and airplanes.
Goods and Services
This final tax category has to do with things you buy and services you use.
This use tax is meant to help local governments raise funds to pay for city infrastructure, personnel, and maintenance. Each state sets its own rate, and some counties can add additional surcharges. Forty-five states collect sales tax, and five do not. If you’re looking for a place to save money on your shopping bill, head to Alaska, Delaware, Montana, New Hampshire, and Oregon.
Of all the forms of taxation, this one seems to be the most equitable because it charges you only for what you consume instead of penalizing someone for making more money. However, critics of sales tax argue that it poses an undue burden on lower-income individuals because it makes the goods that they buy relatively more expensive. In most states, grocery items are not taxed in an effort to keep food prices at attainable levels.
These taxes are similar to sales tax, but they impose a flat tax on an item regardless of the price. Gasoline is a prime example. It doesn’t matter how much a particular gas station charges per gallon. Instead, the government imposes a specific amount per gallon. In addition to federal excise taxes on gasoline, states may also impose their own taxes.
If you want the convenience of using a cell phone or getting from Point A to Point B on the highway, you may have to pay a tax for that. There are user fees imposed for many everyday services, including utilities, licenses, registration, airline tickets, and more. These fees are meant to offset the benefits someone receives by requiring them to pay the government for the privilege.
Having fun is also taxed. The government imposes taxes on items they consider sinful according to a puritan society. Alcohol and cigarettes are commonly taxed items in this category.
Following the logic that the rich can afford it combined with an effort to collect taxes on income that gets “written off,” there are steep taxes for luxury goods that you have to be fairly rich to afford. Jewelry and fancy cars fall into this category.
Tips to Minimize Taxes
Despite the wonderful privileges we enjoy by having a civilized society, virtually everyone would prefer to pay less in taxes.
If you’re looking to reduce your tax burden, these tips can help:
When you see all the various ways that the government can take your hard-earned money, it can feel like highway robbery. The average American pays 29.2% of their income in taxes, but this percentage can be much higher in higher income tax brackets.
To learn more about how you can minimize your taxes, contact us today. We can review your current tax situation and find the best approach for moving forward.