Classification of Taxes

The federal government and many states and localities impose a wide range of taxes on you. Although the income tax is the most substantial and most common, there are other classifications or categories of tax that don’t relate to your income. In most cases, you may be responsible for paying more than one class of tax in the same year, but for different reasons.

Federal Income Tax

If you are like most taxpayers, then you are quite familiar with the federal income tax. This is the reason most people rush to get their tax returns prepared and filed by April 15. The federal income tax provides the main source of revenue for the government, and is the reason the federal government is able to provide you with all the services it does, such as welfare programs, military defense and advanced infrastructure for transportation. Almost two-thirds of the revenue the federal government receives from the income tax is already budgeted for particular programs and services, with the remaining funds being spent at the discretion of Congress and the president.

Estate and Gift

The federal government also raises revenue, albeit much less than the income tax provides, from estate and gift taxes. These taxes aren’t very common since only the wealthiest taxpayers ever pay them. The estate tax imposes a tax on the value of all property and money a person leaves behind at death. However, only estates that have significant value, generally in the millions, are subject to the tax. The gift tax uses a similar approach, but imposes a tax on the money and property you give away during your lifetime. Just as with the estate tax, the gifts you make must have substantial value before you have any gift tax obligations.

Employment Taxes

Yet another federal tax that most people pay is employment tax, which specifically funds the Social Security and Medicare programs. These taxes are withheld from your paycheck just like the income tax, but they essentially provide the financial support for these two programs only. Without these taxes, Americans would not receive a Social Security check or have access to Medicare during their retirement.

State and Local Taxes

Some of the taxes you pay are classified as state or local taxes, and are always due regardless of whether you also pay federal taxes or not. Just as with federal taxes, there is a wide range of state and local taxes you may pay. This includes the property taxes you pay to your local government on the value of your home, state income tax on your earnings, sales taxes when you purchase goods and even inheritance taxes when you receive money or property in a will. Fortunately, with all these state taxes to pay, the federal government gives you a break and allows you to deduct many of them. Currently, if you itemize on your federal return, you can deduct state and local property, income and sales taxes.