Income taxes, unemployment taxes, and other types of taxes are part of daily life. Here's a breakdown of what you pay and why.
- We pay taxes in return for important services-- social security, street lights, military protection, and schools. Income taxes are the most familiar, as we've seen them taken out of our paychecks. Payroll withholding taxes include federal, state, and local income taxes, federal and state unemployment taxes, and Medicare and social security taxes.
Federal tax rates vary depending on your net income and filing status. Social security and Medicare payroll taxes, also known as FICA taxes, are paid by employees and employers. For high earners, once you reach your social security threshold for the year, no more taxes are withheld.
There are also other taxes that you pay on things that you buy, own, or do, such as sales tax, property tax on your home, estate or inheritance taxes when someone dies, or the taxes on gasoline, phone, and utility bills. Not everyone pays all those, because some states don't levy some of these taxes.
Property tax usually includes a home, but it may also include other high value items, such as a car. They are based on an assessed value of the item in question, but there is no national standard and states' tax rates widely differ. Estate and inheritance taxes are paid when a person dies and has a set amount of assets. Gift taxes may be due when you give money or property to others.
Some states have an estate tax, and a few states have an inheritance tax that beneficiaries must pay on the property they inherit. Many other services carry taxes, such as gas stations, airlines, hotels, and rental cars.
Besides knowing how investment earnings are paid out, it's important to know how your earnings will be taxed. Interest on bonds, certificates, and savings accounts, is taxed as ordinary income, unless the investment is taxed as exempt or deferred. Stay financially fit, friends.