When you deep dive into the USA tax structure, you will realise that there are many types of taxes in the USA. Read more to know!
Types of Taxes in the USA: The vast majority of taxes may be categorised into one of three categories: those based on what you earn, those based on what you buy, and those based on what you own.
It is essential to remember that every dollar that goes toward taxes was originally a dollar of income generated by the taxpayer. One of the most significant distinctions between the various sorts of taxes described below is the point of collection: when the tax is paid. Mentioned below are the types of taxes in the USA.
Taxes on the Income of Individuals
The wages, salaries, investments, and any other forms of income that an individual or household brings in are subject to a tax known as an individual income tax, sometimes known as a personal income tax.
The income tax rate in the United States ranges from 10 per cent to 37 per cent. It begins to apply when a person reaches a predetermined income criterion. Tax brackets refer to different annual income levels. Every dollar of income is subject to taxation.
Taxes on The Profits of Corporations
A corporate income tax, often known as a CIT, is a tax on business profits by the federal and state governments. Payoffs are calculated by subtracting a company’s revenues (what it earns in sales) from its costs (the cost of doing business).
Capital Gains Taxes
“capital assets” refers to stocks, bonds, residences, vehicles, jewellery, and art. When one of these assets improves in value, this results in a capital gain. For example, when the price of a stock goes up, this results in a capital gain.
Paying Taxes on What You Purchase
Sales Taxes
Taxes on sales are a consumption tax imposed on the wholesale and retail transactions of various products and services. If you live in the United States, there is a good chance that you are aware of the concept of sales tax because it is printed at the bottom of retail receipts.
Sales tax rates can influence the retail establishments that customers choose to patronise substantially, but the sales tax base—that is, what is and is not subject to sales tax—also plays an important role.
Taxes Based on Gross Income
A firm’s gross sales are subject to gross receipts taxes (GRTs), levied regardless of the company’s profitability, and do not consider business costs. This is a significant point of differentiation from the other taxes that corporations have to pay, such as those based on profits or net income, such as a tax on corporations’ earnings, or final consumption, such as a well-implemented sales tax.
GRTs are especially detrimental to new enterprises, which typically incur losses in their first few years of operation, and to companies with lengthy production chains.
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Value-Added Taxes
The Value-Contributed Tax, sometimes known as VAT, is a consumption tax calculated based on the value-added at each product or service production stage.
The value-added tax (VAT) is a tax on final consumption since it is paid by the final consumer, who cannot deduct the VAT they have already paid on other purchases.
Excise Taxes
Excise taxes are levied on a particular item or activity and are typically set in addition to a more general consumption tax. Excise taxes comprise a very insignificant and highly variable portion of total tax receipts. Tobacco products, alcoholic beverages, carbonated soft drinks, gasoline, and gambling are typical instances of excise taxes.
Payroll Taxes
Payroll taxes are payments made by both employees and employers to support Social Security, Medicare, and other social insurance programs. These taxes fund essential social welfare benefits but can also impact employees’ take-home pay and increase labour costs for businesses.
Features:
- Employee and Employer Contributions: Both workers and employers contribute to payroll taxes.
- Funding for Social Security and Medicare: These taxes help maintain Social Security, Medicare, and unemployment insurance programs.
- Mandatory Deductions: Payroll taxes are automatically deducted from employees’ salaries along with the employer’s contribution.
Advantages:
- Direct Funding for Social Programs: Payroll taxes are a primary source of funding for social welfare programs, such as retirement benefits and other social services.
- Stable Revenue for Programs: This steady income stream supports the reliable funding of Social Security and Medicare.
- Employee Benefits: These taxes help fund programs that provide financial support and a safety net for workers.
Disadvantages:
- Reduction in Take-Home Pay: Payroll taxes reduce the amount of money employees take home, which can be frustrating for those seeking higher disposable income.
- Increased Labour Costs: Employers face higher labour costs due to their share of payroll tax contributions.
- Sustainability Challenges: Funding social programs can become complex due to factors like population changes and economic shifts.
Annual Report or Franchise Tax
Most states require businesses to file information reports regularly, but not all states mandate annual filings. Some states only require biennial reports, due every two years. Regardless of the frequency, the purpose of these reports remains consistent.
Provide Updated Information on the Business:
The primary purpose of an annual report is to keep business information current. States want certain details about a company to be easily accessible to the public. Over a year, many changes can occur in a business, such as a change of location, new management, or a different registered agent. The annual report ensures that states have the latest information on businesses.
Supply Revenue Stream for the State:
State governments often seek additional revenue sources. Annual report fees, which all incorporated or registered businesses must pay, provide a steady revenue stream for the state.
Income Tax in the US for Foreign Freelancers
Foreign freelancers working in the US are subject to specific tax rules. For the 2023-24 tax season, the self-employment tax rate is 15.3%. This includes 12.4% for Social Security and 2.9% for Medicare.
While nonresident employees on payroll typically aren’t taxed for Social Security and Medicare, self-employed workers are. For the 2023 tax year, the Social Security wage cap is $160,200, meaning you won’t pay Social Security tax on income over this amount. In 2024, this cap increases to $168,600.
If your business has a net profit of over $400, you must pay both income tax and self-employment tax.
Taxes on the Things You Own Taxes on Your Property
Property taxes mainly levied on immovable property, such as land and buildings, are an essential source of revenue for state and municipal governments in the United States. These taxes are collected from the owners of the property.
Property taxes in the United States account for more than 30 per cent of the overall amount collected in state and local taxes combined and more than 70 per cent of the total amount collected in local taxes. The revenue collected through property taxes is the primary funding source for public services provided by local governments.
In general, taxes on real property are reasonably stable, non-discriminatory, and transparent, in contrast to taxes on tangible personal property, which present a more significant challenge.
Taxes on Tangible Personal Property (also known as TPP)
The term “tangible personal property” (TPP) refers to any item of real estate that can be physically moved or handled, such as a piece of furniture, machinery, merchandise, or a vehicle.
Taxes on TPP account for a relatively insignificant portion of total state and local tax collections; however, they are complicated, which results in high compliance costs; they are not neutral, as they give preferential treatment to particular industries over others; and they distort investment choices.
Taxes on Estates and Gifts Received by Heirs
The value of an individual’s assets at the time of their passing is subject to estate and inheritance taxes, respectively. The estate itself is responsible for paying estate taxes before assets are given to heirs; nevertheless, inheritors are the ones who are responsible for paying inheritance taxes on the property they get. Both tariffs are typically coupled with a “gift tax” so that they cannot be sidestepped by the transfer of property before death to avoid paying the taxes.
Taxes on Affluence
Taxes on wealth are customarily levied annually and apply to an individual’s “net wealth,” which is defined as their total assets, less any debts they may owe.
For illustration’s sake, an individual who owed $500,000 in debt but had a total asset of $2.5 million would have a net wealth of $2 million. If a wealth tax is applied to all wealth more significant than $1 million, then the individual would owe a total of $50,000 in taxes under a wealth tax set at 5%.
Conclusion:
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