Do you pay your taxes? When you just read that were you thinking about the money that comes out of your paycheck? You are probably taxed way more than you think.
Here are some of the types of taxes that you might have to pay.
Federal Income Tax
Income tax is the tax that most of us are most familiar with. This comes out of our paychecks. This is for many the largest component of what we pay in taxes. Income tax is the tax on new money that comes to us, either from working, net profits from our company, or passive income like interest or dividends.
State Income Tax
We also pay income tax at the state level. That is to say that in addition to paying income tax to the federal government, we also pay income tax to our state as well. Some local governments even collect local income tax.
Capital Gains Tax
If you buy property and then sell that property for more than you paid for it, you will owe capital gains taxes on the gain. For example, if you buy an investment for $100 and sell it for $150, you will owe capital gains taxes on the gain of $50.
If you own property, you will owe a percentage of the value of your property to the government. This tax is often ignored or at least misunderstood when people think about mortgages locking in their payment for 30 years. Mortgages lock in principal and interest payments, but if the value of your home goes up, your property taxes go up.
The gift tax is a tax on giving your money to others. Admittedly, it's difficult for most of us to have to pay this, because there is an annual amount you can give without paying taxes and a lifetime amount under which you don't have to pay any taxes (although a tax return usually needs to be filed). However, it still exists.
Sales tax is a tax on the stuff you buy. You might hear this referred to as a consumption tax. This is based on the value of the stuff you buy. The more you spend on something, the more you pay in sales tax.
A sin tax is a tax, in addition to sales tax, that gets applied to purchases that the government thinks are bad things to buy. Examples are alcohol, tobacco, gambling, marijuana, and sometimes sugar, coffee, and fast food.
Excise tax is much like sales tax, in that it is a form of consumption tax, but this is not a percentage and is usually a given rate per unit. The most common example is gasoline tax, where we pay a certain dollar amount per gallon of gas. The price of gas can fluctuate, but the cents per gallon doesn't.
When you die, the value of all the stuff you own minus your debts is called your estate. If your estate is above a certain value you owe estate tax. Your heirs will have to pay taxes from the money in your estate before anything can be distributed to your beneficiaries.
Some states have an inheritance tax in addition to the estate tax. If someone you know dies and leaves you money, his or her estate is taxed before that money comes to you, then you have to pay an inheritance tax on what you received.
What's The Point?
The point here is for you to see just how complicated tax law can get. It doesn't take long. The point is not say whether taxes are good or bad, either. There is no mention of what governments do after they collect your money. I only offer this as a high-level summary of all the different types of tax you may face and to make you aware that tax planning is very important.
For example, if you want to move to a state that doesn't have a state income tax, have you considered what that state's sales tax and property taxes will be? It's possible you could come out behind by moving. Just be aware of all the taxes and how they apply to your situation and you'll be on your way to good money health.
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