Although your personal income tax filing is probably foremost in your mind right now, the government taxes us in a number of different ways.
This is actually helpful for you because it gives you multiple opportunities to find ways to reduce your tax burden, while spreading out the impact of taxes.
Want to learn more? Here are the four types of taxes we’re all subject to, and tips on how to minimize their impact.
1. Personal Income Taxes
Most Americans who received income this year will have to file a tax return, and many of us will actually get a refund on our taxes because we overpaid through paycheck withholding. These taxes are a very important source of revenue for the federal, state, and local governments because they are paid regularly throughout the year, thus helping to balance budgets and keep smaller governments from having budget crises. You can do the most to affect your personal income taxes, through personal tax deductions and credits, as well as making smart moves with investments. Capital gains taxes have different rates depending on how long you have held the investment, so keeping track of when you bought items can affect how much you end up paying – holding it a few more days can pay off!
Some of the money taken out of your paycheck goes to fund various programs, such as Medicare and Social Security, as opposed to general federal taxes which are apportioned by Congress. Cutting down your taxable income will affect the amount you pay into Social Security, which will in turn affect the amount of money you’re eventually able to get in your own Social Security benefit. Career waitresses, housecleaners, and other individuals who are paid mostly in tips or under the table sometimes find out to their distress that they’re actually eligible for very little Social Security, because they didn’t report that income on their taxes and thus didn’t receive credit for it.
2. Consumption Taxes
Otherwise known as sales tax, consumption taxes are one tax that’s more heavily levied on the wealthy (or, at least the wealthy who buy things, excepting Warren Buffett) since it is assessed as a percentage of the sales price. Thus the more you buy, the more you pay. The federal government doesn’t get involved with setting sales tax, so all rates are set by the state and local governments, and they can vary greatly from place to place. Every state except Alaska, Delaware, Montana, New Hampshire, and Oregon assesses sales tax.
In most states that have a sales tax, groceries and prescription drugs are excluded from sales tax, so as to reduce the burden on poorer individuals. You frequently don’t pay sales taxes on items bought over the Internet though online shopping from companies that don’t have a physical presence in your state. Unfortunately, there’s not too many ways to get out of sales tax, short of buying less, using the barter system, or living entirely on goods from Amazon. However, you do have the option to choose to deduct your sales tax instead of your income tax if you itemize your taxes, so if you live in a state that doesn’t have income tax, you get a nice break there.
3. Property Taxes
This is the oldest form of taxation, and probably the easiest to keep track of too, since they aren’t making any more land! Property taxes in the US tend to be used for local concerns such as school district funding. They’re generally calculated based on the value of your property – the value of the land itself plus the value of any buildings you have on it, such as your home – and go up by predetermined amounts, set by your county auditor or equivalent office. You can save money on your property taxes by appealing the property tax assessment on your home. You’ll need to get your home appraised to prove that it is not worth the value the county is using to set your tax amount.
This is especially important if the value of your home has declined – or at least if the value of comparable homes in your neighborhood has.
You also pay property taxes of a sort on non-real-estate property such as cars and boats. Licensing fees for your car are a type of property tax.
4. Estate Taxes
It’s surprising that the federal estate tax generates so much rancor these days, given that it is actually a very old form of taxation. There is evidence of an estate tax going back to 700 BC in Egypt. This is an area, though, in which the average person can rest easy and the wealthy sweat, because any money you leave behind generally isn’t taxed unless it goes above a fairly high threshold. In the past several years, you’d have had to leave behind a million or two to even begin worrying about it, and if you left it to your spouse, they didn’t get taxed at all. With judicious use of gifting, trusts, and other financial wizardry related to estate planning, many wealthy individuals are subject to very little estate tax. This is definitely an area where you’re able to affect your taxation level, but you’ll need to involve a professional as the laws are constantly changing and can become very complicated.
Remember, the tax filing deadline in April isn’t the only day you’re taxed as an American citizen. You can reduce the amount of taxes you pay all year long by learning more about the rules and regulations of sales, property and estate taxes.
How are you utilizing the different types of taxes to minimize your tax burden?