A Brief Overview On Different Types Of Income Taxes

Federal, state and local governments charge different types of income taxes to raise money to maintain and improve their daily operations. These taxes, in most cases, affect the income earned by corporations and individuals. The IRS (Internal Revenue Service) collects these taxes every year. In America, many people consider them as the most aggressive “debt collectors”. Any outstanding taxes on you are debts that you must repay; these debts are not dischargeable even in bankruptcy. In order to ensure that all individuals pay taxes in time, governments have a system, as per which, employers pay salaries and wages to their employees and workers after deducting (which is mandatory deduction) a certain amount of money on the basis of the income level. The total money thus collected is used to pay taxes at the end of the year. If you are eligible to save some taxes by using certain deductions, the IRS returns that much money through tax refund, which is again a time consuming process.

Personal Income Tax

Personal income tax is probably the most common among the different types of income taxes. This includes dividends, interest income, and earned wages. These taxes are also referred to as progressive taxes because the person earning a higher income must pay higher taxes. For example, as per the US tax laws in 2009, individuals paid 35% of the income over $372,950 while they paid taxes at the rate of only 10% for the first $8,350 of taxable income.

Capital Gains

If you have invested in certain goods or properties, the income thus earned is refereed to as capital gain. If it is a loss, it is called capital loss. How much taxes are charged on that income depends mainly on whether it is a short-term or a long-term capital gain. If you have invested a certain amount of money for at least twelve months, it is a long-term investment and the income thus earned is long-term gain. As per the current laws, you must pay capital gain taxes at 15% of the total income you get from such long-term investments.

Corporate Income Taxes

Different types of income taxes are applicable to companies also. If you run a company, you must pay corporate income tax on the profit (if any) you thus earn from it within a year. These taxes are charged on both federal and state levels. These taxes when combined at both levels become one of the highest rates in the world. In 2009, it was 39.1%. Probably, that is the reason why there has been continuous debate on different issues, such as whether the double taxation on dividends received by shareholders and paid by companies is fair. After all, both the companies as well as their shareholders are supposed to pay taxes on this dividend – for the companies, it is profit; for the shareholders, it is income. Despite such controversies, as per the current laws, both companies and individuals (who receive dividends) must pay taxes on it.

Social Security And Medicare Taxes

The different types of income taxes charged under this category are regulated by the Federal Insurance Contributions Act. Those who work under an employer, the Social Security and Medicare taxes are divided between them and their employer. For example, at present, the social security taxes are charged at the rate of 12.4%, where both you and your employer pay 6.2% each. Likewise, the rate at which the Medicare taxes are charged is 2.9%, where both you and your employer must pay 1.45% each.

Even self-employed individuals must pay different types of income taxes on their income. Since these individuals do not have any employer as such (they have clients), they are liable to pay the total amount of Social Security and Medicare taxes alone, which is 15.3% and is charged on 92.35% of the total income.