Understanding Different Types Of Taxes!

Taxes are required payments made by individuals or corporations to governments to fund critical services such as roads and schools. This comprehensive article will give you an understanding of taxation, including income, sales, tariffs, and property duties. We’ll look at fundamental concepts including tax types, collecting techniques, and their implications for financial plans. Understanding taxes is critical because they influence economic policy and social initiatives. Join us as we explore the maze of tax regulations, revealing practical insights and strategic tactics for effective tax management. We also have compiled a list of best 10 books which are highly recommended to understand all about Trading. Do check it out!

Let us start this guide by answering a simple question, What are Taxes?

What Are Taxes?

What Is TAX

Taxes are mandatory contributions to the government, come in various forms, and are critical for funding public services such as roads and schools. They have an impact on both individuals and corporations, altering consumer prices and company finances. Income taxes and sales taxes, for example, help the government generate revenue and implement economic objectives. Understanding these taxes is critical for managing finances and navigating complex economic systems.

Understanding Basic Mechanism Of Taxes!

Most countries, including the United States, rely on taxes from individuals and companies to fund important public works and services. These taxes are critical to the development and maintenance of the infrastructure required for the country’s operation and residents’ well-being.

Income taxes are a frequent type of taxation that affects many different sources of income for taxpayers. This revenue could come from salary, investment profits, dividends, interest, or payments for products and services.

Tax revenues are used for a variety of objectives, including funding public services, government operations, and programs such as Social Security and Medicare. However, as the population ages, particularly among the baby boomers, the allocation of tax money to Social Security and Medicare has increased significantly over time.

Taxation principles Understanding Different Types Of Taxes

Tax laws have long been the subject of heated political discussion in the United States. Taxes require a mandatory deduction of a proportion of one’s earnings or income, and tax evasion—intentionally evading full tax obligations—is a serious felony. Tax avoidance, which is legally reducing tax payments in order to enhance after-tax revenue, is permissible.

Most governments set up agencies or departments to collect taxes. In the United States, the Internal Revenue Service (IRS) performs this function at the federal level.

Different Type Of Taxes

Here are most common types of taxes at a glance,

  1. Income Tax
  2. Corporate Tax
  3. Payroll Tax
  4. Sales Tax
  5. Estate Tax
  6. Property Tax
  7. Tariff

Now let us understand about each of them in detail!

Disclaimer: Explaination provided about these taxes is based on American regulations. Do understand that, basic definition remains same however specifics like rate and govt guidelines do change!

Income Tax

Income tax Understanding Different Types Of Taxes

In the United States, there’s a system for income tax that’s called progressive. This means that people who earn more money pay a higher percentage of their income in taxes compared to those who earn less. The way taxes work is based on something called marginal tax rates.

Different things can affect how much tax a person has to pay. One big factor is their filing status. For example, if someone is married and files their taxes jointly with their spouse, they might pay a different amount of tax compared to someone who is single or head of household. Where the money comes from also matters when it comes to taxes.

Understanding different types of income is important for knowing how taxes work. For people who invest money, capital gains taxes are something to know about. These taxes are charged by the government when you sell something, like stocks or property, for more than you paid for it.

The amount of tax you pay on the profit from selling depends on how long you’ve owned the thing you sold. If you owned it for a short time, like a year or less, you’ll pay taxes at your regular income tax rate. But if you owned it for longer, you might pay taxes at a lower rate. The idea behind this is to encourage people to invest their money.

It’s a good idea to keep records of when you bought things and when you sold them. This helps to prove how long you owned something when you’re doing your taxes.

Corporate Tax

Corporate Taxes Understanding Different Types Of Taxes

Corporate taxes are an important part of how businesses manage their money. Let’s break down how a company figures out how much it owes in taxes:

  1. Sales Revenue Minus Cost of Goods Sold (COGS): First, a company subtracts the cost of making its products from the money it earns by selling them. This tells us how much money the company made after covering its basic expenses.
  2. Gross Profit Minus Operating Expenses: Next, the company takes away other expenses, like paying for things like marketing, staff, and research. This gives us the company’s earnings before it pays interest and taxes.
  3. EBIT Minus Interest Expense: Then, the company takes away any interest it owes on loans. What’s left is the taxable income—the amount the company will be taxed on.

In the United States, companies used to pay a tax rate of 35% on their profits. But after a law called the Tax Cuts and Jobs Act in 2017, the rate was lowered to a flat 21%.

Now, there’s a new rule that came into play in 2022. It’s called the 15% corporate minimum tax. This tax only affects really big companies—ones that have a lot of money. If a company’s book value (how much it’s worth on paper) is over $1 billion, or if it makes over $100 million from its U.S. operations over three years, it has to pay this minimum tax.

Understanding these taxes helps businesses plan their finances better and stay on the right side of the law. It’s important for companies to keep up with these changes and get advice from financial experts to make the best decisions for their business.

Payroll Tax

Payroll Tax Understanding Different Types Of Taxes

Payroll taxes play a crucial role in financing vital programs such as Medicare and Social Security. When employees receive their paychecks, a portion is automatically withheld by their employers—1.45% for Medicare and 6.2% for Social Security—which is then remitted to the federal government to support these initiatives. Beginning in 2023, the Medicare contribution remains unchanged, but there’s a shift for Social Security, with individuals now paying 6.2% on earnings up to $160,200, an increase from the previous limit of $147,000 in 2022.

It’s important to note that payroll taxes encompass both employee and employer contributions. Employers match the percentages withheld from employees, meaning they also pay 6.2% for Social Security and 1.45% for Medicare for each employee. When combined, the total remitted to the government amounts to 15.3%—comprising 6.2% for Social Security and 1.45% for Medicare from both parties. Unlike income taxes, payroll taxes are earmarked specifically for funding Social Security and Medicare programs.

For self-employed individuals, they’re required to pay both the employee and employer portions of these taxes, known as self-employment taxes, which also contribute to Social Security and Medicare. Understanding the mechanics of payroll taxes is essential for comprehending paycheck deductions and supporting critical government initiatives that benefit the wider community.

Sales Tax

Sales tax Understanding Different Types Of Taxes

Sales taxes are fees added to the total cost of a purchase when a customer pays for a product or service. It’s the responsibility of the business to collect these taxes from the customer and then send the collected funds to the government.

However, it’s worth noting that sales tax rates can differ from one place to another. This is because each state has the authority to establish its own sales tax rate, leading to variations based on location. Moreover, some cities and counties have the flexibility to set their own rates, as long as they adhere to the guidelines established by their respective state governments. This decentralized approach to sales tax regulation allows for regional flexibility while ensuring compliance with state tax laws.

Estate Tax

estate tax Understanding Different Types Of Taxes

Estate taxes are a type of tax imposed on the value of an estate that surpasses a certain threshold determined by law. In 2023, the federal exclusion limit stands at $12.92 million, a slight increase from the previous year’s $12.06 million. Notably, surviving spouses are exempt from these taxes, providing a measure of relief during a challenging time.

Calculating estate taxes involves subtracting the exclusion limit from the taxable estate. For instance, if an estate is valued at $14.7 million, the tax would apply to the amount exceeding the exclusion limit, which in this case would be $1.78 million.

The estate tax rate follows a progressive structure, with marginal rates ranging from 18% to 40%. The highest rate of 40% is applied to the portion of an estate exceeding the exclusion limit by more than $1 million.

It’s important to consider that individual states may have different exclusion limits compared to the federal government. However, no state imposes taxes on estates valued at less than $1 million. Notably, states like Massachusetts and Oregon adhere to this $1 million exemption threshold.

Moreover, state estate tax rates can also differ from the federal rate. For instance, in 2022, states like Hawaii and Washington had the highest estate tax rates, capped at 20%. Understanding these nuances is essential for estate planning and ensuring compliance with relevant tax laws.

Property Tax

Property Tax

In the United States, one of the most common types of taxes on property is the real estate ad valorem tax. This tax is calculated using a millage rate, which indicates the amount charged for every $1,000 of a property’s assessed value. The assessed value of a property is determined by a government-appointed property assessor at the local level, and reassessments typically occur every one to five years.

It’s important to note that property tax rates can vary significantly depending on the jurisdiction. Additionally, many states also levy taxes on tangible personal property, such as cars and boats, adding to the complexity of the tax system.

As of the fiscal year 2018, New Jersey had the highest property tax collections per capita in the country, amounting to $3,378 per person. If the District of Columbia were included among the 50 states, it would surpass New Jersey, with collections reaching $3,740 per capita. On the other end of the spectrum, Alabama had the lowest property tax collections per capita, at just $598. These variations highlight the significant differences in property tax burdens across different states and regions.


A tariff is a tax that a country imposes on goods and services imported from another country. The goal is to promote buying products made within the country by raising the prices of items brought in from abroad.

There are primarily two types of tariffs: fixed fee tariffs and ad valorem tariffs. Fixed fee tariffs are set amounts based on the type of item being imported, while ad valorem tariffs are calculated as a percentage of the item’s value, similar to how real estate taxes are determined.

Tariffs often spark political disagreements, with some arguing about whether they achieve their intended objectives.

Tax Delinquency

Different types of taxes have distinct deadlines or reporting requirements. Some taxes, like sales taxes or tariffs, are collected immediately at the time of a transaction or just before it. Others follow a fixed schedule, with due dates repeating on specific dates or combinations of days and months—such as property taxes, which are typically due on the first day of April. However, these due dates can vary between different governing bodies; for instance, different counties may have different property tax deadlines.

Failure to pay the appropriate amount of tax to the taxing authorities can result in various penalties. For the taxes mentioned above, penalties may include:

  • A one-time fee or charge imposed as a penalty assessment.
  • Interest charges that increase over time based on the length of the overdue payment.
  • Placing a lien on the assets of the delinquent party if they are unable to meet their tax obligations.
  • Denial of access to services for transaction-related taxes, such as tariffs.
  • Seizure of company property or the placement of a lien on company assets for business-related taxes.

It’s essential for individuals and businesses to adhere to tax deadlines and requirements to avoid facing these penalties and ensure compliance with tax laws and regulations.


In summary, taxes are the payments individuals and businesses make to governments to support important services like roads and schools. This guide has explored different types of taxes, such as income, sales, property, and corporate taxes, as well as payroll and estate taxes. It’s crucial to understand these taxes because they affect economic policies and social programs. Not paying taxes on time can lead to penalties like fees, interest charges, or even seizure of assets. By understanding tax rules and planning wisely, people and companies can manage their finances effectively and contribute to their communities.