As a citizen of the United States, you are subject to taxes on the federal, state and local levels. Everyone must pay federal taxes, but each state can decide its own taxes to impose on its residents. Many states impose the same taxes as the federal government, but they also have additional taxes that the federal government does not impose.
The income tax is one of the federal government’s main taxes. Levied by the Internal Revenue Service (IRS), the income tax applies to the annual earnings of individuals, corporations, trusts and other legal entities. Taxpayers pay different marginal tax rates based on their filing status (single, married filing jointly, married filing separately and head of household) and income earned. In 2012, tax rates ranged from 10% for the lowest income earners to 35% for the higher earners.
The amount of income the federal government can tax is your gross income after adjustments and tax deductions. Taxpayers may take a personal exemption and may either take a fixed standard deduction or itemized deductions to reduce their taxable income. Possible deductions include charitable donations, home mortgage interest and qualified educational expenses. Taxpayers may also reduce their taxable income by taking tax credits, which include credits for a dependent child, credits for education expenses and the Earned Income Tax Credit for low-income wage earners. In addition, certain income may be exempt from taxes, including interest on state and local bonds, certain types of gifts and inheritances and certain benefits, such as employer provided health insurance.
Like the federal government, most states also impose their own income taxes, though rates vary by state. Nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Washington—have no individual income tax for their residents. Most states have similar concepts and definitions of income and deductions as the state government, although rules regarding deductions vary widely.
(Also Read: Income Tax Basics: Everything You Should Know)
Payroll taxesare imposed on both employers and employees by state, local and federal governments. An employer is required to withhold payroll taxes from an employee’s paycheck. The payroll tax deductions go towards paying federal income tax, Social Security tax, Medicare tax, state income tax and various local taxes. An employee may take voluntary payroll deductions which can include health insurance premiums, life insurance premiums, retirement plan contributions and employee stock purchase plans. These deductions may be paid with pre-tax or post-tax dollars, depending on the type of benefit being funded.
In addition to the employee’s share of payroll taxes, the employer must also pay its own portion of the taxes. Employers are responsible for paying a portion of Social Security taxes, Medicare taxes, federal unemployment taxes and state unemployment taxes.
Estate And Gift Taxes
The federal government imposes estate and gift taxes, and some state governments impose these taxes as well. The estate tax is a tax on the right to transfer property after death. Everything you own or have an interest in at the date of your death comprises your gross estate. Certain deductions may be taken, which can include mortgages and other debts, estate administration expenses and property that pass to surviving spouses and qualified charities. A filing is required for estates with combined gross assets exceeding $5 million or more for decedents dying in 2010 or later.
A gift tax is a tax on the transfer of money or property from one individual to another, while receiving nothing in return. The tax applies even if the donor did not intend the transfer as a gift. A federal gift tax is imposed on such a transfer if the amount exceeds $13,000.
Excise taxes are paid when purchases are made towards a specific good, such as gasoline, tobacco and alcohol. Some states impose a specific fuel tax for gasoline, diesel fuel and gasohol. Those taxes are imposed in addition to the federal excise tax on gasoline and diesel fuel. The excise tax is often already included in the price of the product.
States also impose their own cigarette or tobacco tax, in addition to the federal tax of $1.01 a cigarette pack. The states with the highest tax on cigarettes are New York, Rhode Island and Connecticut. States with the lowest tax include Missouri, Virginia, Louisiana and Georgia. Several cities and other municipalities also charge a cigarette tax. New York City charges a high tax, which, when added to the state tax, makes the city the most expensive place to buy cigarettes.
Sales And Use Taxes
States impose many taxes on their residents that the federal government does not. For example, the federal government does not impose sales or use tax, but all but five states do. These are taxes on retail sale, lease and rental of goods and services. Pay for a dinner? A portion of your payment was likely for sales tax. Buy some new pants? Also subject to sales tax. The sales and use tax is equal to a set percentage of a purchase price and is collected at the time of the sale. Tax rates vary widely by jurisdiction, ranging from under 1% to over 10%. States with the highest sales tax are California, Indiana, Mississippi, New Jersey, Rhode Island and Tennessee.
Generally, neither the state nor the federal government is responsible for property taxes. These are usually taxed on the local level by counties, cities or other local governments. Very few states impose a tax on the value of property.
Taxes are administered by hundreds of tax authorities. At the federal level, there are three tax administrations. The Alcohol and Tobacco Tax and Trade Bureau administer alcohol, tobacco and firearms. The United States Customs and Border Patrol administers taxes on imports. All other taxes within the United States are administered by the IRS.
The true differences between the taxes imposed by the state and federal government vary from state to state. Most states impose the same types of taxes that the federal government does, in addition to a sales tax. For a comprehensive list of the different state taxes, you can check out the Federation of Tax Administrators guide for state comparisons here.