by Alex Franch, Tax Specialist
What types of taxes are you paying? Or another way to ask this is, what are the different types of taxes are you paying?
1. Federal income tax (The more you make the more they take)
FIT is a progressive tax. The rate of taxation increases along with your income. If you (married, 2 kids, house, mortgage) are making $100k & your tax is $5,316, FIT doesn’t seem so bad. Your kids, real estate taxes, and mortgage are all subsidized. Let’s fast forward a couple of years and things are going really well. You landed a killer job and scores a few raises and you are now making $200k. Your tax did not double, nor did it triple, in fact, you tax went up by nearly a magnitude of six to $30,422. Your marginal tax rate may show 25% but it is really 30% because all that stuff being subsidized is being phased out.
2. Old-Age, Survivors, and Disability Insurance (OASDI aka Social Security)
SS tax is a regressive tax and it applies on an individual basis rather than household as the FIT. You as an individual only pay on the first $117k of your income and then you are done for the year. If you made $117k and your spouse made another $117k, you paid just as much in SS tax as Warren Buffet and Bill Gates combined.
3. Medicare Tax (was flat, now not so much)
Medicare tax was traditionally a flat 1.45% on your earned income. This last year it was expanded to include an additional 0.9% above certain incomes and 3.8% on certain types of passive income.
4. Capital Gains (including LT, ST, recapture, etc.)
This tax is like a game of ‘whack-a-mole’ Capital gains often depend on two things, the length of time an asset is held AND the type of asset. I can think of the following rates: 0%, 5%, 15% 18.8%, 20%, 23.8%, 25%, 28%, and all the FIT rates which may apply. This is what compromise looks like.
5. Alternative Minimum Tax
Everyone who wanted a ‘flat’ tax and got it now hates it. There are only two rates, 26%, and 28% so on the face, it seems like a fairly flat tax. However, your marginal rate can be as high as 35% because all your write-off’s are being phased out.
6. State income taxes (not so united)
By my last count, we have 7 states with no income tax, 36* states (including DC) with a progressive income tax, 6 states with a flat tax (including Massachusetts), and 2 states (Tennessee and New Hampshire) that tax just dividends and some other miscellaneous items.
*4 of these states have the top tax rate that begins under $10k which would make them almost ‘flat.’
7. Sales Tax
Let’s classify every type of transaction and assess a different rate on each depending on where you are and where you live. Also, let’s make sure businesses have to report on a monthly basis. Also, you may have to report this on your personal tax return depending on where you bought stuff and where you keep that stuff.
8. Other Use Taxes (Real Estate, excise, etc)
I guess you kind of get what you pay for on this.
I’m sure I am missing another few dozen taxes that we pay on a regular basis. I also haven’t touched upon corporate, trust, or estate taxes. Please feel free to write in if you hear of any interesting taxes out there.