What Are The Types Of Taxes In USA? Full Guide

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types of taxes in USA

As a citizen, it is crucial to know about your country’s tax system. This is because the government collects taxes and funds different social projects, including health and education. 

Different countries have different tax systems. You will find three different types of taxes in the USA, including municipal, state, and federal taxes. These are the three main types of taxes a US citizen has to pay. However, the division of taxes can be made easier by dividing them in –

  • Taxes on earning
  • Taxes on purchase
  • And taxes on inheritance.

But first, I will start by clarifying federal, state, and municipal taxes. Then, here is a detailed guide on different types of taxes in the USA. 

Tax Systems In The USA

Tax Systems In The USA

US citizens must pay taxes on their income, purchases, and inheritances. In addition, income taxes are levied on different types of self-employment, independent labor, capital gain, and profit from selling real estate assets.

A US citizen is taxed based on three different factors-

  • The citizen’s income
  • The state they live in 
  • And the area they are a member of. 

The percentage of tax change across different US States. If you are from North Dakota, your payable tax should as low as 2.9%, which changes in California, rising to 13.3%. Here are more details on tax in the US. 

Federal Tax

In the US, your income tax return to the federal US government is the main source of the federal government budget. Your tax is directly paid to the Internal Revenue Service. The revenue from the Federal Tax helps fund various government projects. These projects include education, natural disasters, relief efforts, and transportation. 

State Income Tax

Some of the US states don’t require state inhabitants to pay any state taxes. You don’t have to pay any taxes in Wyoming, South Dakota, Nevada, Florida, Washington, Alaska, and Texas.

Also, inhabitants must pay taxes varying from one state to the other. The tax levied can be collected on a flat rate or on a progressive scale based on the form. A huge amount of state tax revenue funds the healthcare sector. The rest of the tax is used for other important social causes such as – the underprivileged, parks, public housing, recreational facilities, environmental projects, and the military.

Municipal Tax

Every community can impose local or community tax upon the inhabitants of a municipality. For example, All the towns in the nation have a community tax. The revenue collected from a local tax is used for different purposes, such as – maintaining the public areas and libraries, fixing the sewage system, cleaning trash, etc. 

Read more: What Are Fixed Income Funds? How To Invest In It?

Different Types Of Taxes In USA

So, what are the types of taxes in the USA? I have already informed you of the three main types of taxes US citizens have to pay. However, different categories of taxes come under these three main types of taxes in the US. So, here is a simpler division of the types of taxes you have to pay in the USA. 

1. Taxes On Income

Taxes On Income

Here are different types of income taxes the US citizen has to pay to the government–

Individual Income Tax

As a US citizen, you have to pay taxes on the salaries, wages, or investments you earn through. Income tax in the US is payable on different types of individual and household earnings. In addition, the income tax might be progressive (tax increasing paralleled with income), meaning the higher earners have to pay a larger amount of tax. The tax levied can range from 10% to 37%.

Corporate Income Tax

Suppose you are liable to pay corporate income tax if you are doing business in the US. Both the Federal and the State governments levy CIT from the profit.

Payroll Taxes

Payroll taxes are a tax levied on US citizens’ wages and salaries to finance different social insurance programs. Employees can see their payroll tax withheld by the employer by looking at their paystub at the end of the month. The combined tax rate in the US includes 12.4% for social security tax and 2.9% for Medicare tax. The total percentage of the payroll tax in the US is 15.3%. 

Capital Gain Taxes

Your capital gain taxes include taxes on everything a US citizen owns for personal reasons. These include investments, bonds, stocks, cars, homes, and jewelry.

2. Taxes On Purchase

Taxes On Purchase

Citizens have to pay different types of taxes in the USA for different purchases made. This includes sales tax, gross receipts taxes, excise tax, and value-added tax. You can read it in detail below. 

Sales Tax

Sales taxes are consumption taxes levied on the different retail goods and services citizens consume. For example, when buying groceries from the local supermarket, you will see the sales taxes printed on the store receipt. Retail store taxes are a significant source of local and state revenue.

Gross receipts Taxes

A company has to pay gross receipts taxes upon the gross sales they have been able to generate. This tax is levied irrespective of the profit made by the company. Businesses have to pay this tax before the deduction of the expenses.

Value Added Taxes

Value-added tax is another consumption tax added to goods and services at the production stage. Every business has to pay VAT on the value of the produced goods. The VAT is applied across 140 countries, making it a significant revenue source and a common form of consumption taxation. 

Excise Tax

Excise tax is levied on specific goods and activities. Some examples of the excise tax are taxes on cigarettes, alcohol, soda, betting, and gasoline. Excise taxes can be volatile. 

Read more: What Is Money Market Funds? How To Invest In It?

3. Taxes On Inheritance & Ownership

Taxes On Inheritance & Ownership

This is the third among the three types of taxes in the USA. Citizens are also liable to pay taxes on things they own. These taxes include – property tax, tangible personal property tax, wealth tax, etc.

Property Tax

The US government levies tax on immovable properties. For example, buildings and essential properties that are revenue sources. This helps both the local and the state governments of the US earn a considerable 30% of the total state and local revenue.

Tangible Personal Property Tax

The TPP tax is payable on the movable, tangible personal properties a US citizen owns. This includes a tax on business equipment, machinery, furniture, inventory, and automobiles. It makes up a minimal share of the complete state and local tax collection. 

Estate & Inheritance Tax

Among different types of taxes in the USA, estate and inheritance tax is levied on the value of a citizen’s property after their death. The estate itself is liable to pay the estate tax, and the heirs can pay the inheritance tax once the asset is distributed among them. 

Wealth Tax

Wealth taxes in the US are levied on an individual’s net wealth. The net wealth tax is calculated by deducting the debt from a person’s wealth. The tax can be levied below a rate of 5% on people with more than $1 million in net wealth.

Read more: What Is Index Funds? How To Invest In It?

Frequently Asked Questions (FAQ):

I think you have found the info you were looking for on the types of taxes in the USA. Here are some additional questions and answers you might want to read –

Q1. What Are The 4 Kinds Of Taxes?

Here are the four different kinds of taxes–
1. Income tax
2. Payroll tax
3. Capital gains tax
4. Estate tax

Q2. How Much Is US Tax On Salary?

There are seven federal tax brackets on your salary. It can range from 10% to 37%, with different rates at 12%, 22%, 24%, 32%, and 35%. The rate of payable income tax depends upon the type of income you have and the salary you earn. 

Q3. How Much Tax Do US Citizens Pay?

According to an OECD report, the tax wedge for a single worker is 28.4% in 2021. This applies to all the average single workers. As for income tax percentage, the average US citizen has to pay in a rate ranging between 10% to 37%.

Final Words

Irrespective of your nationality, you should be aware of the different types of taxes you, as a citizen, are liable to pay. As for the USA, I have offered a detailed guide on the types of taxes in the USA. As a US citizen; you are liable to pay all the federal, state, and local taxes.

Was this article helpful? If you have any questions, you can let us know in the comment section, and we will answer as soon as possible.

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Shahnawaz is a passionate and professional Content writer. He loves to read, write, draw and share his knowledge in different niches like Technology, Cryptocurrency, Travel,Social Media, Social Media Marketing, and Healthcare.

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