{"id":12669,"date":"2025-03-30T12:20:41","date_gmt":"2025-03-30T12:20:41","guid":{"rendered":"https:\/\/finderica.com\/?p=12669"},"modified":"2025-03-30T12:20:41","modified_gmt":"2025-03-30T12:20:41","slug":"a-complete-guide-to-tax-categories","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=12669","title":{"rendered":"A Complete Guide to Tax Categories"},"content":{"rendered":"
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It\u2019s often said that paying taxes is one of life\u2019s only certainties. There are many ways to pay taxes. As the federal deadline gets closer, it\u2019s a good time to learn about them. With that in mind, here are some common tax types explained, plus tips for filing.\u00a0<\/p>\n

How Taxes Differ\u00a0<\/h2>\n

Different taxes are paid at different times. Federal, state, and payroll taxes are taken from your paycheck. Other taxes, like sales tax, are charged when you buy goods and services. States and local governments also charge excise taxes on some items, like cigarettes.\u00a0<\/p>\n

Not every type of tax applies to everyone. For example, the federal estate tax would only apply if you died and your estate was\u202fworth more than $13,990,000.<\/a> Also, if you don\u2019t smoke, drink alcohol, or gamble, you don\u2019t have to pay excise taxes on those things.\u00a0<\/p>\n

Types of Taxes\u00a0<\/h2>\n

Let\u2019s look at all the different types of taxes you might face, broken down into categories.\u00a0<\/p>\n

Progressive Tax\u00a0<\/h3>\n

With this tax, you\u2019re taxed based on how much you earn. The U.S. has a progressive tax system, which generally means people owe more as they earn more.\u00a0<\/p>\n

There are seven income tax brackets for the 2024 tax year<\/a>. They range from 10% (for single filers earning less than $11,600) to 37% (for single filers earning $731,200 or more). Your bracket depends on your earnings and filing status.\u00a0<\/p>\n

Regressive Tax\u00a0<\/h3>\n

With this type of tax, wealthy people pay less than others. Flat taxes are also sometimes called regressive. In a flat tax, the rate is the same for everyone. This is considered regressive<\/a> because it would hurt low-income people more than wealthy people.\u00a0<\/p>\n

For example, sales taxes are collected as a percentage of the sale price of goods and services. They are considered regressive because they make up a bigger part of low-income families\u2019 total income.\u00a0<\/p>\n

Proportional Tax\u00a0<\/h3>\n

A proportional tax is the same as a flat tax. It would be the same for everyone, no matter their income. While not common at the federal level, this tax is often used in state sales taxes<\/a>.\u00a0<\/p>\n

Consumption Tax\u00a0<\/h3>\n

This is a tax on what you spend. Sales taxes and excise taxes<\/a> are types of consumption taxes.\u00a0<\/p>\n

Property Tax\u00a0<\/h3>\n

Property taxes are important to consider if you\u2019re thinking of buying a house, land, or commercial real estate. You must keep paying the taxes as long as you own the property, unless you can get an exemption.\u00a0<\/p>\n

Some veterans can get homestead tax exemptions<\/a>. This depends on their state and disability ratings. Also, some states have property tax exemptions for senior citizen homeowners<\/a>. Rules vary among states, but the minimum age is usually between 61 and 65.\u00a0<\/p>\n

Capital Gains Taxes\u00a0<\/h3>\n

These are taxes based on the money you make when you sell something for more than you paid for it. Most people think about capital gains in terms of things like investments. However, you might still have to pay taxes on interest and dividends, such as from a bank account, even if you don\u2019t have investments.\u00a0<\/p>\n

Payroll Taxes\u00a0<\/h3>\n

These taxes pay for Social Security, Medicare, and federal unemployment benefits. They also pay for disability and survivor benefits.\u00a0<\/p>\n

Income Taxes\u00a0<\/h3>\n

This is a tax on the amount you earn. There are different tax rates for different income levels. People who earn the most pay a higher tax rate.\u00a0<\/p>\n

Estate and Inheritance Taxes\u00a0<\/h3>\n

These taxes are paid after a person\u2019s death. They come from the deceased\u2019s net worth.\u00a0<\/p>\n

The estate tax is a tax on your right to transfer ownership of your assets when you die. As mentioned earlier, most estates won\u2019t need an estate tax return. You only need one if the estate is worth a certain amount, which changes each year. The amount for 2025 is $13,990,000 or more.\u00a0<\/p>\n

If the threshold is met, the IRS decides the fair market value of all the deceased\u2019s assets. This becomes the \u201cgross estate.\u201d Then, some deductions<\/a> are allowed to get to the \u201ctaxable estate.\u201d These include property that will go to a surviving spouse.\u00a0<\/p>\n

Some states have an inheritance tax. You pay this when you receive property or money from a deceased person\u2019s estate. How much you owe depends on your state and your relationship with the deceased. In general, the taxable amount is based on the amount distributed.\u00a0<\/p>\n

What These Tax Types Look Like in Real Life\u00a0<\/h2>\n

To better understand the different types of taxes, let\u2019s follow Tammy, a fictional character, through a series of taxable moments.\u00a0<\/p>\n

Progressive Tax: Tammy Gets a Raise\u00a0<\/h3>\n

Tammy started the year making $40,000. A few months in, she got a promotion that bumped her pay up to $50,000. This moved her into the next federal tax bracket, taking her from 12% to 22%.\u00a0\u00a0<\/p>\n

The good news for Tammy is that she won\u2019t have to pay the full 22% on all her income. Tax brackets in the U.S. only apply to the portion of your income that falls within each bracket. This means Tammy pays 10% on the first $11,600 she earns, 12% on the next $35,550 (taking her up to the $47,150 cutoff), and 22% on the remaining $2,850.\u00a0<\/p>\n

If she hadn\u2019t gotten the raise, Tammy would have owed $4,568 in federal taxes for the 2024 tax year. With her raise, she now owes $6,053.\u00a0<\/p>\n

Proportional Tax: Tammy Goes Shopping\u00a0<\/h3>\n

Tammy\u2019s new position requires her to speak at a conference, which she needs to buy an outfit for. She grabs a new pair of shoes, some slacks, a nice blouse, and a blazer. Before taking the items to the register, Tammy adds the price tags up to a total of $300. But the cashier tells her that the final price is $328.68.\u00a0<\/p>\n

This is because Tammy lives in Louisiana, a state with very high sales tax. Like all the other shoppers in this state, she owes an extra 9.56% on most of what she buys.\u00a0<\/p>\n

Consumption Tax: Tammy Treats Herself\u00a0<\/h3>\n

After getting home from the conference, Tammy splurges on a pack of cigarettes and a bottle of wine to celebrate her success. On top of the 9.56% sales tax she pays on these items, she also has to pay an extra $1.08 for the cigarettes and an extra $0.08 on the bottle of wine. These are excise taxes, a type of consumption tax designed to discourage certain behaviors.\u00a0<\/p>\n

Property Tax: Tammy Buys a House\u00a0<\/h3>\n

Tammy\u2019s promotion gave her the extra funds she needed to finally reach her savings goal for a down payment. She purchases a $150,000 home. Because of property taxes, she now has to pay an extra $41.25 each year for as long as she owns the home.\u00a0<\/p>\n

In Louisiana, property taxes are calculated based on 10% of a house\u2019s fair market value, which would be $15,000 for Tammy. Fortunately, Louisiana also has a homestead exception that reduces the taxable value of owner-occupied primary residences by $7,500.\u00a0<\/p>\n

Tammy\u2019s parish has a property tax rate of 0.55%. The taxable value of her home is $7,500 ($15,000 minus the $7,500 homestead exception), adding up to $41.25 in annual property taxes.\u00a0<\/p>\n

Capital Gains Tax: Tammy Sells Stock\u00a0<\/h3>\n

That down payment put quite a dent in Tammy\u2019s finances, so she decides it\u2019s finally time to sell some stocks that she bought years ago. When she logs into her trading account, she\u2019s surprised to find that her stocks are now worth $5,000. That\u2019s five times more than what she bought them for!\u00a0<\/p>\n

Selling these stocks gives her a $4,000 capital gain (the $5,000 she sells them for minus the $1,000 she bought them for). Since she held these stocks for more than a year, she needs to pay long-term capital gains tax on them.\u00a0<\/p>\n

Long-term capital gains tax rates are based on income levels. For Tammy, this is 15%, so she needs to pay $600 in taxes on the $4,000 profit she made from the sale.\u00a0<\/p>\n

Estate Tax: Tammy Discovers a Long-Lost Relative\u00a0<\/h3>\n

One morning, Tammy is enjoying a cup of coffee on the front porch of her new home when she gets a surprise visit from a stranger. This stranger is a family lawyer for a distant relative that Tammy didn\u2019t even know she had. He tells her that this mysterious relative passed away recently, and now Tammy is set to inherit the entire $15 million estate!\u00a0<\/p>\n

Louisiana doesn\u2019t have state estate taxes, but being worth more than the $13.99 million cutoff, this inheritance will still be subject to federal estate taxes. Like income tax rates, estate tax rates are marginal<\/a>. Here\u2019s how it works out in Tammy\u2019s case:\u00a0<\/p>\n