Well, the midterms are upon us, and we often hear about taxes. We hear things like “To fund this idea we would need to raise taxes,” or “if this bill passes, we will reduce the deficit and lower taxes on hard-working middle-class families. We will make the billionaires and Wallstreet pay their fair share”. Whether you are Republican, Democrat, or Independent taxes are something most of us must pay. As young professionals it’s important to be aware of the different taxes and understand where those tax dollars are supposed to go. We will examine the taxes at both the State and Federal levels. Some states have different taxes than others which can be calculated differently. For a break down of your state tax percentages check out this website State Government Websites | Internal Revenue Service (irs.gov). Also, visit your local Department of Revenue website.
Essential taxes young professionals should be aware of
1. Sales Tax
Sales tax is governed at the state level. There is no national sales tax. This means that each state has its own sales tax laws and rates. Sales tax is imposed on all transactions involving the sale of goods and services in a state, except for certain items that are exempt from tax. The tax rate can vary depending on the type of good or service being sold, as well as the jurisdiction in which the sale takes place. Sales tax is typically collected by the seller at the time of sale.
What is exempt from sales tax?
Some items that may be exempt from sales tax are:
- Food
- Prescription drugs
- Medical devices
- Childcare services
- Some educational materials and services
2. Income Taxes
Income Tax is assessed on both earned income (such as wages and salaries) and unearned income (such as interest and dividends). This type of tax is also levied on capital gains (the profit made from selling an asset such as a stock or a house). The Income Tax Act sets out the tax rates that apply to different types of income. The tax rates are progressive, which means that higher amounts of income are taxed at higher rates. The Income Tax Act also sets out the deductions and credits that can be used to reduce the amount of Income Tax payable. Income tax is used to finance the government’s expenditure on public goods and services such as healthcare, education, and infrastructure.
Which States don’t have a state level income tax?
There are seven states in the United States that do not have a state level income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. These states rely on other forms of taxation, such as sales taxes, to generate revenue.
3. Reemployment Tax
Reemployment tax is a federal payroll tax that funds unemployment compensation benefits. Businesses are required to pay this tax if they have employees who work in the United States. The tax is used to help workers who have lost their jobs due to no fault of their own. Reemployment tax is also known as the Federal Unemployment Tax Act (FUTA) tax.
How is Reemployment Tax imposed?
Reemployment tax is imposed on the first $7,000 of wages paid to each employee in a calendar year. The tax rate is 6% for most employers. However, certain employers may be eligible for a reduced tax rate of 5.4%. The reduced tax rate applies to employers who have been paying their unemployment taxes on time and have been subject to minimal claims.
4. Estate Taxes
Estate taxes are taxes imposed on the transfer of property at the time of an individual’s death. This type of tax is also known as inheritance tax or death duty. For federal estate tax purposes in the United States, the fair market value of all assets owned by the deceased person as of the date of death is used to calculate the taxable estate. Estate taxes are imposed on the estate, not on the beneficiaries. The estate tax rate is 40%.
Why do Estate Taxes exist?
Estate tax is a controversial topic, with some arguing that it is unfairly levied on those who have already paid taxes on their income and investments. Others argue that estate taxes are necessary to prevent the accumulation of wealth in a few families and to ensure that everyone pays their fair share. The debate is unlikely to be resolved anytime soon, but it is important to understand how estate tax works to make informed decisions about your own finances.
What is estate planning?
Estate planning is the process of anticipating and arranging for the disposal of an estate during a person’s life. It typically involves the creation of a will or trust, which will set out how the estate is to be distributed after the person’s death.
It can be a complex process, as it must consider the individual’s assets, liabilities, family situation, and estate tax implications. However, estate planning is important for everyone, as it can help to ensure that your wishes are carried out after your death and that your loved ones are provided for. For estate planning strategies please speak with a legal representative to make sure you make the best decision for you and your family. 😊
5. Capital Gains Tax
Capital Gains Tax (CGT) is a tax imposed on the profit realized from the sale of certain assets. The most common assets subject to CGT are shares, investment properties and businesses. Capital gains are calculated by subtracting the purchase price of the asset from the sales price. If the resulting figure is positive, then a capital gain has been made and CGT is payable. If the figure is negative, then a capital loss has been made and no tax is payable.
How is Capital Gains taxed?
Capital gains are taxed at different rates on ordinary income. For individuals, the tax rate on capital gains is 20% (plus Medicare levy). This is lower than the marginal tax rate of 32.5% that applies to most other forms of income. Capital gains tax is not payable on all assets. There are several exemptions and concessions that can apply, such as the main residence exemption, the small business concessions and the rollover relief provisions. These can significantly reduce the amount of tax payable on a capital gain.
Can Capital losses offset capital gains?
Yes, Capital losses can be offset against capital gains to reduce the overall tax liability. Capital losses can also be carried forward and offset against future capital gains.
6. Property Taxes
Property Tax is a tax on real property. Real property includes land and buildings, as well as anything attached to the land, such as trees, fences, and wells. Property tax is usually collected by the local government in which the property is located. The amount of tax owed is based on the value of the property. Property taxes are used to fund public services such as schools, roads, and police and fire protection. Property tax is the largest source of revenue for local governments in the United States.
7. Gift Taxes
Gift taxes are taxes imposed on the transfer of property by one individual to another. This type of tax apply to both tangible and intangible property, including money, stocks, bonds, and other assets.
The federal government imposes a gift tax on transfers of property worth more than a certain amount. For 2018, the gift tax exemption is $15,000 per person. That means you can give up to $15,000 worth of property to any one person during the year without owing any gift tax.
For Example, if you give a gift tax that is more than the exemption amount, you’ll need to file a gift tax return. The gift tax rate is currently 40%. So, if you give someone $20,000 worth of property, you’ll owe $2,000 in gift tax ($20,000 – $15,000 = $5,000; $5,000 x 40% = $2,000).
8. Payroll Taxes
Payroll taxes are taxes that are deducted from an employee’s paycheck. The funds are then used to pay for social welfare programs, such as Social Security and Medicare. Payroll taxes are imposed by both the federal government and state governments.
Payroll taxes are generally divided into two categories: social security taxes and Medicare taxes. Social security taxes are used to fund the Social Security program, which provides benefits to retired and disabled workers, as well as their dependents. Medicare taxes are used to fund the Medicare program, which provides health insurance coverage for seniors and some disabled individuals. Payroll taxes are generally imposed on both the employee and the employer.
Payroll taxes are imposed at the federal, state, and local level. The federal government imposes payroll taxes on wages earned in all states. State governments may also impose payroll taxes on wages earned within their borders. Local governments may also impose payroll taxes, but this is not common. Payroll taxes are generally deductible from an employee’s taxable income.
9. Dividend Tax
Dividend tax is a tax that is applied to the dividends that shareholders receive from companies. this type of tax is usually imposed by the government on the company that pays the dividend, and not on the shareholders themselves. However, in some cases, shareholders may be required to pay taxes on their dividends. Dividend taxes are typically much lower than other types of taxes, such as income taxes.
What is the dividend tax rate?
In the United States, the federal dividend tax rate is 15%, while the state dividend tax rate can be as high as 13.3%.
10. Use Tax
Use tax is a tax imposed on the use of goods or services in a jurisdiction in which those goods or services were not taxed at the time of purchase. This type of tax is generally imposed by state and local governments on purchases made from out-of-state sellers. Many states have reciprocal agreements with other states, whereby taxes paid to one state are credited against taxes owed to the other state. Use tax is also imposed by some local governments on leased vehicles and equipment.
What are Sales and Use Tax versus Sales Tax and Use Tax?
In the United States, use tax is generally imposed at the same rate as sales tax, but it is not always possible to collect both taxes on the same transaction. Use tax is imposed on purchases made from out-of-state sellers, but sales tax is typically only imposed on purchases made from in-state sellers. Use tax is also imposed on the use of leased vehicles and equipment, but sales tax is not.
Consequences of holding funds, what are Tax Brackets, Loopholes, and Shell companies?
These are the most common Taxes that are used at the State and Federal level. There are some who have business’s and decide not to pay their Sales Tax and Use the money to keep their businesses going. Depending on your state statue this can be characterized by “Theft of State Funds” and can come with penalties. For example, in the State of Florida theft of state funds could be penalized 100% of the tax amount owed. So, if a person held $15,000 and used it for the business that States Department can pursue the $15,000 Sales Tax and tack on a $15,000 penalty. For taxes that are unpaid there can be different collection and enforcement actions taken against the individual or the business. Some of these actions may be an audit, lien, or bank freeze.
What is a lien?
A Lien is a legal claim or right against a property, often used as security for a debt or other obligation. The owner of the property (the “debtor”) is usually aware of the lien, as it is typically created when they take out a loan. If the debtor fails to meet their obligations under the loan agreement, the creditor may be able to seize the property. Depending on the type of lien, the creditor may also have the right to force a sale of the property to repay the debt.
Liens can be placed against both real and personal property, including homes, cars, boats, and other assets. In some cases, a lien may even be placed against intangible property, such as patents or copyrights.
What is an audit?
An audit is an independent evaluation of an organization’s financial statements and records. The purpose of an audit is to ensure that the organization is in compliance with generally accepted accounting principles (GAAP) and to provide assurance that the organization’s financial statements are accurate and free from material misstatement.
Audits are conducted by external auditors who are hired by the organization being audited. External auditors are typically independent accounting firms that are not affiliated with the organization being audit.
What is a bank freeze?
A bank freeze is a legal measure that can be taken by a bank or other financial institution to protect its assets. This typically happens when the bank is facing insolvency or is otherwise at risk of defaulting on its obligations. The bank may also impose a freeze to comply with government regulations or to prevent money laundering. When a bank freeze is imposed, it means that the bank’s customers are not able to access their accounts or withdraw funds. This can cause significant inconvenience and may even lead to financial hardship for some.
What are income brackets?
Income brackets are income ranges that the government uses to determine tax rates. There are different income brackets for different tax rates. The income bracket you fall into depends on your income. Income brackets are income ranges that the government uses to determine tax rates. There are different income brackets for different tax rates. The income bracket you fall into depends on your income.
What are income bracket thresholds?
Income bracket percentages are the income thresholds that define which income earners fall into which income tax bracket. The income brackets and associated marginal tax rates vary from country to country. The income bracket percentages vary depending on the country. In the United States, the income bracket percentages are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The income bracket taxes help to fund public services such as education and infrastructure.
For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
The other rates are:
35%, for incomes over $215,950 ($431,900 for married couples filing jointly).
32% for incomes over $170,050 ($340,100 for married couples filing jointly).
24% for incomes over $89,075 ($178,150 for married couples filing jointly).
22% for incomes over $41,775 ($83,550 for married couples filing jointly).
12% for incomes over $10,275 ($20,550 for married couples filing jointly).
What are tax loopholes?
Tax loopholes are special provisions in the tax code that allow certain taxpayers to save money on their taxes. These provisions can be used by individuals, businesses, or other entities, and they can be exploited in a variety of ways.
Some tax loopholes are legal and perfectly legitimate, while others may be considered questionable or even illegal. Many tax loopholes are created unintentionally by the tax code, while others are purposely created by lawmakers.
Tax loopholes can be exploited in several ways, including:
– Taking advantage of deductions and credits that you’re not entitled to
– Failing to report all your income
– Claiming personal expenses as business expenses
– Hiding income in offshore accounts
What are shell companies?
A shell company is a company that exists primarily on paper, with few or no employees and no real business activity. Shell companies are often created for the purpose of holding assets or for use in financial transactions. shell companies can be used for legitimate purposes, such as to hold investments or property, but they can also be used for illegal activities, such as money laundering, tax evasion, and fraud.
How are shell companies created?
Shell companies are often created by setting up a shell corporation in a jurisdiction with lax financial regulations. This can be done by incorporating the shell company in a country with little or no taxes, such as the Cayman Islands or Delaware. The shell company then opens bank accounts and transfers assets to these accounts. The shell company may also engage in financial transactions, such as loans, to make it appear more legitimate.
Conclusion
As a young professional, it’s important to be aware of the different taxes you may be liable for. The 10 essential taxes we’ve listed are a great starting point, but there are certainly more taxes out there that you need to know about. If you’re an entrepreneur, sole proprietor or small business owner be sure to keep track of all the tax deadlines and what you need to do to comply with the regulations. If you have questions about taxation or anything else related to your personal finances, or business finances, don’t hesitate to reach out to a financial advisor. Thanks for reading!