10 Types of Taxes You Need to Know

Key Points

  • Most individuals are subject to various taxes.
  • Many tax rates are based on a marginal scale, with the higher tax rate only going into effect for the proportion of income above the threshold.
  • Most taxes are based on your income and filing status.

Table of Contents

  1. Ordinary Income Tax
  2. Corporate Income Tax
  3. Capital Gains Tax
  4. Depreciation Recapture Tax
  5. Net Investment Income Tax (NIIT)
  6. Self-Employment Tax
  7. Sales Tax
  8. Property Tax
  9. International Tax
  10. Estate Tax
  11. Summary

Taxes are a fundamental component of America’s financial system. The average American will pay nearly 25% of their income in taxes, whether that be ordinary income taxes, property taxes, or payroll taxes.

Understanding the types of taxes that exist can help you properly tax plan and find ways to reduce your burden. In this article, we’ll cover the 10 main types of taxes that you might encounter.

Remember, taxes are personalized, meaning the types of taxes you are subject to may differ amongst your friends and family members, especially if you have a business.

1: Ordinary Income Tax

Ordinary income taxes are one of the most common types of taxes that business owners and individuals will pay. The US tax system operates based on marginal brackets. As your income increases, your tax rate will increase.

Marginal tax brackets for tax year 2023

Tax RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
10%$11,000$22,000$11,000$15,700
12%$44,725$89,450$44,725$59,850
22%$95,375$190,750$95,375$95,350
24%$182,100$364,200$182,100$182,100
32%$231,250$462,500$231,250$231,250
35%$578,125$693,750$346,875$578,100
37%$578,126$693,751$346,876$578,101

Marginal tax brackets for tax year 2024

Tax RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
10%$11,600$23,200$11,600$16,550
12%$47,150$94,300$47,150$63,100
22%$100,525$201,050$100,525$100,500
24%$191,950$383,900$191,950$191,950
32%$243,725$487,450$243,725$243,700
35%$609,350$731,200$365,600$609,350
37%$609,351$731,201$365,601$609,350

Once you move up in the bracket, your gross income isn’t taxed at the new rate. Instead, only the proportion of income over the previous bracket will be subjected to the higher tax rate. For example, if you make $45,000, the first $11,600 of your income will be taxed at 10%, and the remaining amount will be taxed at 12%.  

2: Corporate Income Tax

Corporate income tax rates apply to businesses that pay taxes at the entity level. There are both federal and state corporate income tax rates. C corporations are the only structure that will pay federal income tax, which is set at a rate of 21% for the 2024 tax year.

Each state has a different tax system in place. Multi-member LLCs, partnerships, and S- Corporations can elect to pay state taxes at the entity level in most states. This can result in a more favorable tax situation compared to passing the income down to the individual return. The Tax Foundation has a great resource that breaks down corporate taxes by each state.

3: Capital Gains Tax

Capital gains tax goes into effect when you sell investments for more than you paid. For example, if you purchase an investment property for $275,000 and sell it for $400,000 three years later, you will have $125,000 of income subject to capital gains tax.

Capital gains tax rates are only effective for long-term gains, which involve assets held for more than one year. If you buy and sell assets within a 12-month period, the sale will create a short-term capital gain or loss, and you may have to pay tax at ordinary income tax rates.

Capital gains tax rates are more favorable compared to ordinary income tax rates: 0%, 15%, and 20%. The rate you can expect to pay is based on your income.

Long-term capital gains tax brackets for taxable income in tax year 2023

Tax RateSingle Married Filing JointMarried Filing SeparatelyHead of Household
0%$0 – $44,625$0 – $89,250$0 – $44,625$0 – $59,750
15%$44,626 – $492,300$89,251 – $553,850$44,621 – $276,900$59,751 – $523,050
20%$492,301 and above$553,851 and above$276,901 and above$523,051 and above

Long-term capital gains tax brackets for taxable income in tax year 2024

Tax RateSingle Married Filing JointMarried Filing SeparatelyHead of Household
0%Up to $47,025Up to $94,050Up to $47,025Up to $63,000
15%$47,026 – $518,900$94,051 – $583,750$47,026 – $291,850$63,001 – $551,350
20%Over $518,900Over $583,750Over $291,850Over $551,350

4: Depreciation Recapture Tax

Depreciation recapture tax comes into play when you sell a business asset that has been previously depreciated for a gain. Depreciation recapture is generally taxed at a rate of 25%. One exclusion from this rule is real estate that has been owned for less than a year, which is taxed at ordinary income rates.

Let’s say that you bought a business asset for $1,000, which you fully depreciated. You sold the asset for $500 a few years later. Since you took full advantage of depreciation, your cost basis is $0, resulting in a $500 gain subject to depreciation recapture.

5: Net Investment Income Tax (NIIT)

The Net Investment Income Tax applies a 3.8% tax to certain investment income. This tax only goes into effect if your income exceeds a threshold, which is $200,000 for single and head of household filers and $250,000 for married filing joint and qualifying widower taxpayers.

Dividends, interest, capital gains, rent income, royalties, business income, and non-qualified annuities are investments that are eligible for the Net Investment Income Tax. Wages, Social Security benefits, alimony, tax-exempt interest, passive business income, and self-employment income are specifically excluded.

6: Self-Employment Tax

Self-employment taxes are a large contributor to the tax bills of small businesses filing Schedule C. Wages from an employer are assessed by both employer and employee Social Security and Medicare taxes. As a self-employed individual, you need to pay these same taxes on your net profit.

You can calculate net profit on Schedule C by taking your revenue minus all expenses. If you had $10,000 of revenue and $6,000 of expenses, your net income would be $4,000. This means that you would be paying self-employment taxes on $4,000 of income.

Self-employment taxes are at a rate of 15.3%, which includes both the employer and employee portion of Social Security and Medicare. Using the above example, you would pay $612 in taxes. However, you can claim a deduction for the employer portion of taxes, or $306.

7: Sales Tax

Sales tax is at the discretion of each state and municipality. This is a tax charged at the point of sale on goods and services. Some states, like Alaska, have no sales tax, while others, like California, have a high state sales tax.

There are two layers to sales tax: state and municipality. The state can set a statewide tax rate, while each municipality can charge an additional amount to raise local funds. Sales tax rates are usually based on budgetary needs. Check out your state’s website to find out your tax rate.

8: Property Tax

Property tax is a tax assessed based on the value of your home. Like sales tax, each county sets its own tax rate based on budgetary needs and community offerings, such as school districts and garbage collection.

Some states calculate property taxes based on the assessed value of your home, while other states will use the fair market value. Property taxes are deductible on your tax return on Schedule A. Many states also offer additional credits and deductions for property taxes paid. If you are a landlord, the property taxes of your rental are fully deductible on Schedule E.

9: International Tax

International taxes can come into play if your business generates sales in a global setting. This can come in the form of Goods and Services Taxes or Excise Taxes. Many countries have treaties in place to lower the amount of income tax in your local country and in the countries where you conduct business.

Even if you don’t have a business, you might pay international taxes on investment income. Many foreign countries must withhold income tax on investment earnings, such as dividend income. You can claim a credit on your individual tax return for taxes paid to other countries, helping you avoid double taxation.

10: Estate Tax

Estate taxes are a type of tax charged on assets passed down to beneficiaries. Your estate includes all property transferred to beneficiaries, like retirement accounts, houses, and businesses.

 IRS Form 706 provides specific information regarding the inclusion of assets in federal estate tax calculations, guidance on determining their values, and instructions on calculating the owed amount. Generally, the tax is determined by applying the specified rates to the taxable portion of the estate.

Marginal tax brackets for tax year 2023

Tax rateTaxable amount
18%Up to 10,000
20%$10,001 – $20,000
22%$20,001 – $40,000
24%$40,001 – $60,000
26%$60,001 – $80,000
28%$80,001 – $100,000
30%$100,001 – $150,000
32%$150,001 – $250,000
34%$250,001 – $500,000
37%$500,001 – $750,000
39%$750,001 – $1,000,000
40%Over $1,000,000

Summary

These 10 taxes can influence your tax bill each year, making it important to consult with an accountant on how you can save money, especially if you own a business. For more information about taxes and accounting, check out our other blog posts.


If you found our article helpful, please support our work: https://www.buymeacoffee.com/us_tax_made_ez

Leave a Comment

Your email address will not be published. Required fields are marked *