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Taxes and Levies LifeBack Tax
The Internal Revenue Service collects over 3 trillion dollars in taxes each year, with states collecting an additional 1 trillion dollars in taxes. Most tax revenue comes from the individual income tax, but also includes payroll taxes, gift tax, estate tax, and various other business taxes. Each tax has its own set of rules and complexities regarding how they are assessed and levied, which may vary between federal and state. Below is a overview of taxes and levies commonly collected by federal and state governments:
Income tax applies to any self-employment income or employee compensation received during the year, such as wages or salaries, commissions, tips, and other earnings, as well as non-exempt fringe benefits or stock options. Other taxable sources of income include interest, dividends, gambling winnings, business profits, capital gains, most pensions, and even Social Security benefits. This can be adjusted with credits and deductions to reduce how much of your income is taxed. Federal and state governments may also have different criteria to determine which types of income are taxable.
The federal income tax is designed to collect from taxpayers based on their ability to pay. It uses a graduated tax system that applies multiple rates to different parts of a taxpayer's annual income based on seven tax brackets, or ranges, with higher income ranges taxed at higher rates. Employed taxpayers pay their income taxes throughout the year through income withholding, while self-employed individuals and business owners must typically make estimated tax payments each quarter. Income tax returns are due on April 15 of the following year.
States set their own tax rates and offer their own deductions or credits, though many states calculate income tax using the federal "adjusted gross income" (AGI) as a basepoint. Eight states (Colorado, Illionois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah) collect income tax as a flat rate instead, meaning all taxpayers are taxed at the same rate regardless of income level. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not collect income tax at all.
Aside from income tax, the government collects additional payroll taxes to fund social programs such as Social Security and Medicare. Social Security and Medicare taxes are covered jointly by the employee and the employer. The employer is also required to pay taxes on federal and state unemployment insurance. Some states may collect other payroll taxes for funding their own social programs, such as state-managed workers' compensation or disability insurance.
Like the federal income tax, Social Security and Medicare taxes are withheld from an employee's pay and deposited throughout the year. Employers are required to file quarterly tax returns to report their payroll tax deposits. Self-employed individuals, who do not have income withholdings, are required to pay a "self-employment" tax on Social Security and Medicare each quarter, and report self-employment taxes on their annual individual tax return. Unlike income tax, overdue payroll or self-employment taxes cannot be discharged in bankruptcy.
The IRS collects a tax on gifts of substantial size. The gift tax can apply to any property or assets given without receiving equal value in return. Certain gifts, such as gifts between spouses or charity donations, are never included. The giver is responsible for paying gift tax.
Each taxpayer has two gift tax exemptions: one annual and one lifetime. Gifts are only considered taxable if they exceed the annual gift exemption, which is $15,000 per recipient per year for 2019. Only the portion above this amount is taxable. When a taxpayer exceeds their annual exclusion, the taxable gift amount is taken out of their lifetime gift exemption, which is $11.4 million for 2019 and adjusted for inflation each year. Taxpayers owe gift tax after using up both the $15,000 annual exclusion and their $11.4 million lifetime exemption.
Federal gift tax returns are generally due on April 15 of the following year, the same deadline as for income tax returns. However, if the gift-giver died early in the year, their gift tax return is due 9 months after their death, along with their estate tax return. Only two states, Minnesota and Connecticut, collect a gift tax.
Federal and some state governments also collect tax on large estates. Estate tax applies to any property or assets transferred to a person's heirs at the time of their death, based on how much the estate's total value exceeds the estate exemption amount. This is based on the value of the whole estate, rather than the amount inherited by each heir.
The federal estate tax exemption is shared with the federal gift tax's lifetime exemption. When you die, your remaining lifetime exemption is applied toward your federal estate tax, and your estate is only taxed at the value that exceeds the $11.4 million lifetime tax exemption. States often set much lower estate tax exemptions, with Oregon's exemption as low as $1 million.
Federal estate tax is due within 9 months of the person's death. Several states have an inheritance tax instead of an estate tax. This is collected from each inheritor rather than the deceased person's estate, with exemptions often based on the inheritor's relationship to the deceased person. Maryland is the only state that collects both estate and inheritance taxes.
Sole proprietorships are not taxed as businesses, and may simply report any business income on their individual tax return. Partnerships, S corporations, and LLCs must report their profits and losses each year, but do not owe federal income tax as business entities. Instead, their profits and losses are passed onto the business owners, who pay income tax at individual rates. C corporations, on the other hand, must pay corporate income tax on their profits. Shareholder dividends are taxed twice: once as corporate income, and again as individual income. (Note that while S corporations do not owe federal income tax, they may still owe corporate income tax at the state level.)
Separately from corporate income tax, many states collect a franchise tax on businesses for the privilege to do business in that state. Typically, a franchise tax applies to limited partnerships, S corporations, C corporations, and LLCs, but not to sole proprietors or general partnerships. Depending on state law, franchise tax may be a flat fee, or calculated based on the company's net worth or total revenue. This means that a business may still owe franchise tax even if it made no profit that year.
Certain businesses may be required to pay federal and state excise taxes on their operations. An excise tax is one collected on certain goods or activities, such as gasoline, tobacco, and alcohol. Many federal excise taxes relate to various fuel, or to vehicles that heavily consume fuel. For instance, the IRS collects excise taxes on air transportation, operation of heavy trucks and semi-trailers, and crude oil or petroleum imports. Indoor tanning salons, manufacturers of fishing or archery equipment, and sports wagerers are also subject to federal excise tax.
Sales and Use Tax
Most states collect sales or use tax on purchases of certain products or services. A retail seller collects sales tax from their buyers and remits it to the state, while the buyer pays use tax directly to the state on taxable purchases where the seller was not required to charge sales tax. The IRS does not collect sales or use tax.
Each state has its own rules for determining its sales tax base: which items are taxed and which are not. Many states collect sales tax on prepared meals at a restaurant, but not on groceries. Some tax digital products such as eBooks or music, which are exempt from sales tax in other states. In some states, services are only taxed if they are tied to the purchase of taxable items, such as labor charges for installing equipment.
New Mexico and Arizona collect a gross receipts tax in place of a standard retail sales tax. This is a type of franchise tax calculated based on a percentage of a company's gross sales revenue to in-state customers, regardless of the items sold. Unlike sales tax, gross receipts tax is officially paid by the seller, though the costs are often passed onto the buyer.
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