In the United States, taxes are a necessary part of life as a law abiding citizen. We may not like paying taxes, but they help pay for crucial systems, such as public education and health.
In order to plan a practical budget, it is important to understand the different taxes that you are being charged. Where you live can affect the types of taxes you pay, too. Continue reading to learn more about income tax, sales tax, property tax and estate tax.
Most taxes can be divided into three categories: taxes on what we earn, taxes on what we buy, and taxes on what we own. Payroll taxes, income taxes, and capital gains taxes are all types of taxes on money that we earn. These are some of the taxes that people report to the state and federal governments every year during tax season.
Income Taxes
Income taxes are exactly what the name suggests: these are taxes charged on the income that you earn. Income can be:
- Salary and wages.
- Tips.
- Investments.
For many people who are employed by another person or company, federal income taxes and state income taxes are automatically withheld from each paycheck throughout the year. However, some states do not have income tax, so residents will not see any state income tax withheld from their paychecks.
Individual income taxes are usually progressive, meaning that they increase as your income increases. In theory, someone with a high salary would be paying more in taxes than someone in a lower income bracket. To calculate your income tax, you should research the tax rates for the year that you are filing.
Self Employment Taxes
If you are self employed as a freelancer, small business owner, or independent contractor, there are likely no income taxes being taken out of your paychecks. This means that you may end up paying more in taxes than people who are not self employed.
For self employed workers, the IRS requires them to make estimated quarterly tax payments to stay on top of the taxes they may owe. Otherwise, they may need to pay in one lump sum when it is time to file federal income taxes. This could be difficult for some self-employed individuals.
It may be a good idea to keep track of your estimated taxes throughout the year so that you are not blindsided when tax season approaches. The federal self employment tax rate is currently set at 15.3% of net earnings.
Capital Gains Taxes
Americans who invest in stock should be aware of capital gains taxes. These are taxes on the profits of investments after they are sold off. Read on to the next slide to learn about taxes on sold goods.
