It’s often said that paying taxes is one of life’s only certainties. There are many ways to pay taxes. As the federal deadline gets closer, it’s a good time to learn about them. With that in mind, here are some common tax types explained, plus tips for filing.
How Taxes Differ
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.
Not every type of tax applies to everyone. For example, the federal estate tax would only apply if you died and your estate was worth more than $13,990,000. Also, if you don’t smoke, drink alcohol, or gamble, you don’t have to pay excise taxes on those things.
Types of Taxes
Let’s look at all the different types of taxes you might face, broken down into categories.
Progressive Tax
With this tax, you’re 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.
There are seven income tax brackets for the 2024 tax year. 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.
Regressive Tax
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 because it would hurt low-income people more than wealthy people.
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’ total income.
Proportional Tax
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.
Consumption Tax
This is a tax on what you spend. Sales taxes and excise taxes are types of consumption taxes.
Property Tax
Property taxes are important to consider if you’re 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.
Some veterans can get homestead tax exemptions. This depends on their state and disability ratings. Also, some states have property tax exemptions for senior citizen homeowners. Rules vary among states, but the minimum age is usually between 61 and 65.
Capital Gains Taxes
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’t have investments.
Payroll Taxes
These taxes pay for Social Security, Medicare, and federal unemployment benefits. They also pay for disability and survivor benefits.
Income Taxes
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.
Estate and Inheritance Taxes
These taxes are paid after a person’s death. They come from the deceased’s net worth.
The estate tax is a tax on your right to transfer ownership of your assets when you die. As mentioned earlier, most estates won’t 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.
If the threshold is met, the IRS decides the fair market value of all the deceased’s assets. This becomes the “gross estate.” Then, some deductions are allowed to get to the “taxable estate.” These include property that will go to a surviving spouse.
Some states have an inheritance tax. You pay this when you receive property or money from a deceased person’s 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.
What These Tax Types Look Like in Real Life
To better understand the different types of taxes, let’s follow Tammy, a fictional character, through a series of taxable moments.
Progressive Tax: Tammy Gets a Raise
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%.
The good news for Tammy is that she won’t 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.
If she hadn’t 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.
Proportional Tax: Tammy Goes Shopping
Tammy’s 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.
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.
Consumption Tax: Tammy Treats Herself
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.
Property Tax: Tammy Buys a House
Tammy’s 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.
In Louisiana, property taxes are calculated based on 10% of a house’s 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.
Tammy’s 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.
Capital Gains Tax: Tammy Sells Stock
That down payment put quite a dent in Tammy’s finances, so she decides it’s finally time to sell some stocks that she bought years ago. When she logs into her trading account, she’s surprised to find that her stocks are now worth $5,000. That’s five times more than what she bought them for!
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.
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.
Estate Tax: Tammy Discovers a Long-Lost Relative
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’t 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!
Louisiana doesn’t 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. Here’s how it works out in Tammy’s case:
- The first $10,000 is taxed at 18%
- The next $10,000 (from $10,001 to $20,000) is taxed at 20%
- The next $20,000 (from $20,001 to $40,000) is taxed at 22%
- The next $20,000 (from $40,001 to $60,000) is taxed at 24%
- The next $20,000 (from $60,001 to $80,000) is taxed at 26%
- The next $20,000 (from $80,001 to $100,000) is taxed at 28%
- The next $50,000 (from $100,001 to $150,000) is taxed at 30%
- The next $100,000 (from $150,001 to $250,000) is taxed at 32%
- The next $250,000 (from $250,001 to $500,000) is taxed at 34%
- The next $250,000 (from $500,001 to $750,000) is taxed at 37%
- The next $250,000 (from $750,001 to $1,000,000) is taxed at 39%
- The final $10,000 (from $1,000,001 to $1,010,000) is taxed at 40%
Before Tammy can collect her inheritance, the executor of the estate must pay a total of $349,800 in estate taxes.
Tips for Filing Taxes
Here are a few tips to remember as tax time gets closer:
- Get help: Taxes are a big part of your financial planning. You should seek help from a professional, like a financial advisor.
- Claim your credits: There are types of relief that can lower your tax bill. These include a Child Tax Credit and Earned Income Tax Credit.
- Know your rights: The Taxpayer Bill of Rights covers things like your right to privacy. It’s important to remember this during the filing process.
- Collect your documents: Gather all the forms you need beforehand. This will keep you from doing it piece by piece while you’re filing. Records you may need include canceled checks, W-2s, 1099s, and receipts.
Wrapping Up
Understanding taxes is important for managing your money. Tammy’s story shows how taxes affect many parts of life, like buying things, owning property, investing, and even inheritance.
Different taxes work in different ways. Income tax changes based on how much you earn. Sales tax is the same for everyone. Other taxes, like capital gains and estate taxes, can be complicated.
Knowing about these tax types can help you prepare. You can make better money decisions if you understand how taxes work.
Taxes don’t have to be hard. You can get help from financial advisors. Knowing about tax credits and keeping good records is important too. These steps can simplify tax season and help you avoid surprises.
