Let’s test your tax knowledge.
What are the different types of taxes?
B) Not Good
That’s a little tax humor for you. I’m here all tax season. Don’t forget to tip your tax preparer!
So, what are the actual different types of taxes?
I hope you’re sitting. There are quite a few:
- federal income tax
- state and/or local income tax
- unemployment tax
- sales tax
- foreign tax
- value-added tax
- estate taxes
- capital gains taxes
- property tax
- excise taxes
- luxury taxes
- corporate tax
- GST tax
- carbon tax
- windfall tax
- Medicare tax
- Social Security tax
- alcohol tax
- gas tax
- … and many others.
It is taxing to talk about the many types of tax. That line kills with CPAs.
I’m going to talk about all the rules for each of these different taxes.
Okay, I’m just kidding. That would be ridiculous. You don’t need to know the rules for each of these, but we’re going to hit the big ones.
First, let’s group them into categories so we can better understand them.
Almost any tax can fit into just one of the following four buckets:
MAKE IT TAXES
Income taxes. You’re probably already familiar with this one. If you make income from a job, from selling lemonade through your business, or from making money from other sources, you might experience an income tax.
Payroll taxes. These are taxes you pay that’s usually from your paycheck for Social Security and Medicare.
Investment taxes. If your investments make money, and let’s hope they do, you may have to pay tax on the gains. For example, if you earn interest or you get rent from someone renting your house, that’s taxed! If you sell an investment for more than you bought it for, that’s taxed, too, and is called a capital gains tax.
Taxes such as the income tax, payroll taxes, and capital gains taxes on the income your investments make all fit nicely in this bucket.
It’s like when you open a can of tuna and your cat and all the cats in the neighborhood come running from out of nowhere. If you make money, the government perks up and becomes very interested.
SPEND IT TAXES
So the government wants a piece if you make it, and now they want a piece when you spend it? Three letters. Y-U-P.
The most common type of “spend it” tax is the sales tax. You buy a box of multi-grain steel-cut oats with flaxseeds cereal . . . who am I kidding? You reach for a box of Froot Loops for $3.99 but end up paying $4.25. That extra 26 cents is sales tax. Sales tax is determined by the state and city where you buy the goods. Some cities and states don’t have any sales tax (shout out to Portland, Oregon) and others do (shout out to Birmingham, Alabama with a sales tax of 10% – ouch!).
When you fill up your gas tank, chances are the price per gallon you pay at the pump includes a bunch of taxes.
If you buy booze or cigarettes, again, chances are the price includes a lot of taxes.
OWN IT TAXES
If you own property, like land or a house, then you will most likely have to pay property tax. Fortunately, property here doesn’t include your stocks and bonds. When I say property, I’m talking about real property. Houses, buildings, and the like.
GIVE IT TAXES
Many years ago, when I was learning about taxes, I just didn’t understand this one. My professor said, if you give money to someone, you might have to pay a tax. Huh? How could this be possible? If I give money to a friend, then I might have to pay tax? How does that make any sense? Sense or no sense, it’s called the estate and gift tax.
If you give too much money away while you are alive, you will have to pay a gift tax. If you give away too much money after you die, it’s called an estate tax. If I were a wittier person, I’d be able to come up with a funny quip related to the old saying, “The only things that are certain in life are death and taxes,” but alas, I’m not, so I won’t.
Make too much, spend too much, own too much, or give away too much, and you will most likely have to pay tax.
What’s the alternative? Don’t make very much, don’t spend very much, don’t own very much, and don’t give away very much? Or, just maybe, there are other ways to reduce the taxes you pay? Keep reading for more on this!
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.