Types of Taxes in the U.S.

Tax collection in the U.S. happens at federal, state, and local government levels. People working in the U.S. are required by law to file tax returns according to a set date and depending on the kind of tax. Even as a non-U.S. citizen working or carrying out investments in the U.S., you are expected to pay taxes according to the W-8BEN tax information.

Taxes play a significant role in the financial and economic decisions and help a government run and provide the public with various services.

In this article, we will look at the few types of taxes you should be aware of when residing or doing business in the US. 

1. Sales Tax

Statistics show that total tax revenue generated due to sales was around $640 billion in 2019. Anyone who buys goods and services is subject to this tax. A sales tax, also known as a consumption tax, applies to the consumption of goods and services. It is collected by the businesses you purchase from as they include the tax in their goods’ prices and remit it to the government. The companies that supply the products are responsible for providing certain proper evidence to the IRS, for example, the resale certificate. 

Each state determines its local tax rate, and the sales tax can differ in different states. To calculate the sales tax, you can multiply the price of a good or service with the tax rate that applies to you. 

2. Travel Tax

With the travel and tourism industries witnessing an annual increase in many countries, it’s good to be on top of the travel policies in your own country. There can be different kinds of travel taxes imposed by the local government, such as on car rentals and lodging. You should be prepared for increased spending when planning a trip. This tax is also likely to be of a fixed amount or rate like the sales tax. 

3. Inheritance Tax 

If you have a property transferred to you from a departed loved one, you must pay an inheritance tax determined by the federal government. Many states also take a percentage of these taxes. An inheritance tax can put a heavy burden on an individual, so the government has introduced some relaxations. If you receive an inheritance after your spouse passes away, you don’t have to pay the inheritance tax.

Similarly, a child who inherits a parent’s estate either pays no tax or is taxed on the part of the inheritance. There are also exemptions from the gift and generation-skipping transfer (GST) taxes for spouses and grandchildren. If the departed did not possess a huge amount of wealth, it’s likely that the inheritors won’t have to pay this tax. 

4. Income Tax 

Regardless of an individual’s employment status, all taxpayers in the U.S. are required to pay a tax on their income through the income tax return. The tax rate is determined by an individual’s net income and their income status. The Internal Revenue Service has established seven brackets for this tax at the federal level. Most states have established distinct tax rates and laws regarding income taxes. 

With the U.S. granting an increased number of non-immigrant visas, foreigners should note that they are also taxed on their earnings or business investments carried out in the U.S. As a non-U.S. citizen, you will be required to fill out the W-8BEN form, which will help reduce the tax rate on your U.S. earned income. Instructions on filling the W-8BEN form can be found online.   

5. Payroll Tax

The payroll taxes of workers are evaluated by the federal government. Employers take out a certain amount of their employee’s salary (withholding tax) to pay this tax, or employees pay it to the government themselves. FICA taxes, which are taxes imposed on employers and employees alike to cover tax insurance, are included in the category of payroll taxes. Medicare taxes and Social Security taxes with tax rates of 1.45% and 6.2% respectively, come under FICA taxes.  

The revenue earned from payroll taxes is often used for distribution to retired, disabled, and unemployed individuals as a part of the benefits granted to them. Filing the tax late or with incorrect information can lead to a penalty ranging from 2% to 10%.

6. Capital Gains Tax

This tax corresponds to the profit made from investment earnings. In addition, dividends and interests gained through bank accounts also have a tax applied to them. The tax bracket determines the capital gains tax for investors as well as the investment duration. In the U.S., the tax rates on short-term capital gains are the same as those of income tax, whereas the rate for long-term capital gains is reduced.

Endnote

In order to avoid the severe repercussions of delayed or incorrect tax filing, it is every citizen’s responsibility to have information about the various forms of taxation in the U.S. If there is any confusion regarding which tax laws apply to you, you can always turn to a tax professional for advice.