People are always talking about taxes. Wherever you hear money, there will be taxes. You may have heard terms like deductible and tax season. Anyone new to the world of tariffs will have trouble following the chain of events that tax. To help you get started, the entire purpose of taxation is paying for the services you get. If we look at the US, a leading global economy, it is a highly taxable society. The US government collects income, payroll, and sales tax from people and companies. The money then gets spread out into different departments depending on their budget. The government will put the money into education, national defense, and even social security. If there is any service you can think of, it’s running with tax money. Now that is the foundation of taxation. You still need to know what they are. Here’s what you need to know when it comes to tax:
1. When You Buy Services
When you buy different services, you get charged a certain amount of tax. There are different types of taxes when it comes to services. Here’s what you need to know.
- Sales Taxes
A sales tax is a tax imposed by the government on the sale of goods and services. Suppose you bought a dress. You’ll see how much tax was on the dress at the bottom of the receipt, along with the principal amount. The US is still one of the few countries that rely on retail sales taxes. It acts as a source of income for the state and revenue. Not every item gets subjected to a federal sales tax, and there are varying degrees to the amount. For example, clothing and electronics are two different categories. So the percentage of tax on both of them is different.
- Gross Receipts Taxes (GRTs)
These taxes get applied to a business’s gross sales. It doesn’t matter if the company had a good month or not. They need to pay. GRTs get imposed on every level of the production chain. If a company has a long production chain, taxes will eventually trickle to consumers. The only drawback for a tax system like GST is if you’re a start-up, your company will face more loss than good.
- Value-Added Taxes (VAT)
These taxes refer to the tax levied on the value of each production stage of any good. Each business gets expected to pay a VAT value on the products and services at different locations. As a consumer, when you buy a product, you pay the final consumption price. You may have noticed these when you order food. You don’t deduct cash from what the business has paid. Instead, you’ll always bear the final consumption.
- Excise Tax
These taxes are on specific goods and activities, which comprise a small portion of the total tax collection. Examples of excise tax include cigarettes and alcohol. Some governments may also levy taxes on smoking to curb harmful habits.
2. Tax on the Money You Make
So far, you understand when you buy any service, you pay a tax for it. You also learned the different types of sales tax. The road to taxation doesn’t end there. Now we will focus on you and how your salary comes under the tax. Here’s what you need to know:
- Individual Income Taxes
A personal income tax is levied on all your wages, salaries, and investments. Suppose you live in a household where everyone earns money they need to pay income tax. Many income taxes are directly proportional to wages. If your salary increases, then you may get taxed higher. The process of collecting these taxes is simple. At the end of every year, every person who earned an income files a tax return to determine whether the government ordered enough.
Corporate Income Tax (CIT)
The federal and state governments levy these taxes on any business profit. The term you need to know is revenue. Revenue is any amount of money a business makes on sales. So if you own a business, you need to pay CIT.
- Payroll Taxes
These are taxes paid on the wages and salaries of employees to finance any social insurance. When you pay your employee, you deduct a certain amount from their paycheck. Your employee will also look at their pay stub to get an idea of how much gets removed.
- Capital Gains Taxes
These taxes get levied on everything you own. These include investments, stocks, bonds, and even jewelry. If one of your assets increases in value, so does the capital gain of the product. There are some rules to the game. If you sell an asset that increases in value, you pay tax on the profit you make. If you’re paying taxes on stocks, you get charged both capital stocks and corporate tax. One of the reasons why it’s called double taxing.
3. Explore Taxes on What You Own
Taxation also enters a final category of what you own. So far, you’ve been paying money for what you make. To help you explore, here’s what you make on what you own:
- Property Taxes
These taxes are on immovable items like land and buildings. They’re a source of revenue for the state and the government. Most people are aware and are paying residential property taxes. However, another form of tax levied is tangible personal property (TPP), which is on vehicles and businesses.
- Tangible Personal Property (TPP) Taxes
A tangible personal property (TTP) property is anything that you can move and touch. These are business equipment, machines, and even inventory. These taxes, although a small share of the total tax collection, are complex. They also discourage businesses from investing since they’ll have to pay tax on any expensive item.
- Estate and Inheritance Taxes
Estate and inheritance tax get imposed on the value of an individual’s property at the time of their death. Inheritance tax needs to get paid by those who inherit the property. These are unavoidable and need to get dealt with. These taxes are complex, and you need help from a lawyer to sort out the documents.
- Wealth Taxes
These taxes get imposed on a person’s net wealth, which is a collection of their assets minus the debts. However, if you happen to have a high amount of wealth, the taxation on you will also be increased. For many consumers, that is not a pretty thought. It discourages innovation since creativity can lead to more taxes.
It will help if you familiarize yourself with the process of taxation. If you belong to an active community, you know that you’ll get taxed. Taxes keep an economy going. Suppose you begin to withhold tax. That is a criminal offense. The tax also depends on the type of money you make. No government will expect you to pay more than you earn. You should know the three basic types of taxation by now. With the information you have. You can start filing your taxes properly today and save yourself tax-related troubles.