Welcome back. There are many types of taxes that exist besides income taxes.

In this video, we'll broadly discuss income taxes as well as property taxes,

transaction taxes, death taxes,

gift taxes, employment taxes,

and other types of taxes.

The focus of our course is on income taxes.

So let's just talk a little bit more about them here.

Although we'll focus on federal income taxes imposed at the federal level,

we should also know that most states and some localities also imposed income taxes.

For example in New York City, Detroit,

Philadelphia all apply income taxes on top of

the state income taxes applied by New York State, Michigan, and Pennsylvania.

These income taxes are also generally imposed on individuals,

corporations, and some fiduciaries.

The pay-as-you go procedures ensure tax collection,

where employers withhold a portion of their employees' earnings as their earn and

remit the employees' share of income taxes to the government on the employee's behalf.

Employers also withhold for federal income tax purposes.

If an individual is self-employed,

then he or she will periodically remit estimated tax payments to

the government to prepay the year's tax liability as the income is earned.

Because there's no employer per se to withhold a portion of

the self-employed person's paycheck and

remit the taxes to the government on their behalf,

the self-employed person must do it him or herself.

Some states in fact do not impose an individual income tax.

But to fund their operations,

these states may impose corporate income taxes

or have higher sales taxes or higher property taxes.

So in all there's a substantial variation in how

cities and states administer their tax systems.

So how is the individual income tax calculated?

This slide shows the individual income tax formula which we'll be

using during the course and studying in much more detail.

The income tax formula begins with income that's broadly conceived or broadly defined.

In other words, the government defines income very broadly

whether it's wages, interest, dividends,

rents, or capital gains or even income

generated from illegal activities like drug dealing.

All of this income must be reported to the IRS unless there are provisions in

the Internal Revenue Code that explicitly allow the income to be excluded.

So this brings us to the next step, to exclusions.

Exclusions are income items that although they're

technically income and money in a taxpayer's pocket,

Congress has decided not to tax that income for whatever reason.

For example, interest earned on municipal bonds

that is interest earned on bonds issued by cities and

states is not part of the federal income tax base and thus the interest is excluded.

The difference between income broadly conceived and exclusions is gross income.

Gross income is the income subject to tax.

Next, we subtract particular deductions or expenses.

These are referred to as deductions for adjusted gross income because they're subtracted

from gross income to produce this adjusted gross income subtotal,

better known as AGI.

Next, the taxpayer can subtract additional classes of deductions.

In fact, they can select to deduct the greater of either itemized deductions,

also known as from AGI deductions or the standard deduction which is

a standard amount that's allotted to each taxpayer based on his or her filing status.

After subtracting either itemized deductions or the standard deduction,

we subtract personal and dependency exemptions.

This is simply the number of people that are included on the tax return

multiplied by some statutory dollar amounts.

Finally, we get to taxable income as a difference between

the AGI and the various additional deductions and exemptions.

Taxable Income is the tax based in the U.S. income tax system.

Finally, to calculate the actual tax liability,

we use our tax tables and tax rate schedules.

From the tax liability,

we can subtract any income taxes that were withheld or prepaid during the year as well

as various tax credits which are dollar for dollar offsets in the tax liability.

The difference between the tax liability and the amount of

prepayments and credits claimed during the year will tell us whether

or not the taxpayer needs to pay more to cover

the entire tax liability because the prepayments and withholdings maybe weren't

enough or if the tax payer prepaid more than

the tax liability during the year that he or she will receive a refund.

So besides income taxes,

property taxes are widely used in the U.S.,

notably, at the city county and state levels.

Property taxes are also known as ad valorem taxes

because the tax base is property rather than income.

Specifically, the tax base is

the fair market value or some portion of it of specified property.

Because it's based on value,

it means that as the value of the property increases the property taxes also increase,

but when the value of the property decreases the tax also decreases.

Real Property taxes include taxes on land and structures affixed to the land.

For example, real estate taxes on one's home

may increase year to year if housing prices rise,

but they should decrease when housing prices fall.

Personal property taxes include taxes on all other types of property besides realty.

For example, Massachusetts has

a motor vehicle tax that's based on the value of one's car.

Because the car values typically decrease over time,

this tax also decreases as the taxpayer holds on to the car.

Of course when a new car is purchased by a taxpayer,

this means the motor vehicle tax rate is quite significant.

So next, we have transaction taxes.

Some examples here are excise taxes and sales or use taxes.

Excise taxes are imposed at the federal,

state, and local levels.

Excise taxes are applied on units rather

than on income or value of the underlying product.

For example, the federal gas tax is charged per gallon of gas sold,

tobacco taxes are applied per pack of cigarettes.

Generally, local governments impose excise taxes on visitors or

other non-citizens who cannot vote in

that jurisdiction and thus they try to fund special projects with their tax revenues.

For example, hotel occupancy taxes and

rental car surcharges are based on

rooms rented or where you rent an automobile respectively.

The tax collections benefit local citizens without

actually having the local citizens pay for these projects.

But unlike excise taxes,

sales and use taxes are based on

the product's underlying value during the time of purchase,

they're not based per unit.

For example, if you buy a thousand dollar television and the sales tax is 5%,

then you'll pay $50 in sales taxes.

Meanwhile, a $500 television will generate $25 in sales taxes for the state,

again a 5% rate.

There's considerable variation in states and other localities.

In fact, some states don't even impose a sales tax.

Use taxes are similar to sales taxes in concept but the use taxes applied on

items purchased outside the taxpayer's home state

but is used in the taxpayer's home state.

Use taxes try to prevent residents of

high sales tax states from going to low sales tax states to

purchase products than bring them home to use them

causing revenue losses for the highest sales tax jurisdiction.

Unlike sales taxes, use taxes are self-reported by taxpayers on

their tax returns and quite frankly very difficult to track by high tax states.

As a result, compliance rates are actually very low.

Next, we'll look at death taxes.

Death taxes or taxes on the right to transfer

or receive property upon the death of an owner.

If it's a tax and the right to pass or bequeath property from a deceased it to the heirs,

then this is an estate tax.

It is in effect imposed on the person that died,

as if dying wasn't bad enough.

But if it's a tax on the right to receive or inherit

property that is by the heirs of the dissidents' assets,

then this is known as an inheritance tax.

The tax based in both cases is the value of the property.

For example the fair market value of the dissidents' estate will

be the tax base when calculating the U.S. federal estate tax.

The US only imposes an estate tax,

it does not impose an inheritance tax.

However, some states levy one or both.

At the federal level,

the unified transfer tax credit reduces or eliminates enough value of

dissidents' estates that they are then not subject to the federal estate tax.

Another type of tax is the gift tax.

Rest the right to transfer property upon or after death is referred to as death taxes,

gift taxes are a tax on the right to transfer assets from

one taxpayer to another while the taxpayer is still alive.

However before it to be considered a gift,

the giving tax payer or the donor must not expect

anything in return from the recipient or donee for that gift.

Such an arrangement is different from other types of income transfers such as wages.

Receiving wages implies that a person did something for

somebody else and thus gets paid for their services.

If a person receives wages,

they are subject to the income tax.

Receiving a gift however is not included in the tax base,

that it's not subject to income tax.

Gift and estate taxes in the US are unified under a single tax rate schedule.

This arrangement effectively caps

the total value of property that can be passed from one person to another.

Either while the donor is alive or upon the donor's death.

Next, our employment taxes also known as payroll taxes.

The first major employment tax is known as FICA,

shorthand for Federal Insurance Contributions Act.

FICA taxes are designed to fund Social Security and Medicare.

Currently, the Social Security portion of FICA is 6.2% of some level of wages.

After which however, the 6.2% does not apply.

The Medicare portion is 1.45% of all earned income,

that is wages or business income but not interest or dividends.

The Social Security and Medicare portions are paid by both the employer and the employee.

Therefore, a total of 7.65% of the FICA tax is paid by

the employee and another 7.65% is paid by the employer,

for a total of 15.3%.

Note that these are additional taxes on top of the regular income tax.

If a person is self-employed,

he or she will need to pay both the employee and employer share of FICA,

that is the full 15.3%.

This is known as the self-employment tax.

However, self-employed individuals get a deduction for one half of self-employment taxes

paid to help level the playing field between being an employee or being self-employed.

Separate from FICA, there are also what are known as Obamacare taxes

tied to the patient protection and affordable care act of 2010.

If your AGI is greater than some threshold amount based on

your filing status then your self-employment income or your earned income, i.e.

your wages are subject to an additional 0.9%

tax on top of the regular income and other FICA taxes owed.

The employer here does not match the 0.9% tax.

If AGI is greater than some threshold,

any an earned income like interest,

dividends or capital gains may be subject to an additional 3.8% tax.

Again, on top of the applicable income taxes owed on that income.

The last type of employment tax is FUTA,

shorthand for Federal Unemployment Tax Act.

This tax funds state unemployment benefits.

Unlike FICA, FUTA is paid only by the employer not by the employees,

and in fact self-employed individuals do not pay the FUTA tax.

The idea behind the FUTA tax is if an employer

hires and lays off employees very frequently,

and these employees then drawn state unemployment benefits these employers FUTA

tax rates will be higher than other employers who have a higher employee retention rate.

Therefore, FUTA does not have the same tax rate for every employer but rather

reflects simply retention rates and encourages higher retention rates.

Finally, a variety of other taxes exist.

Federal Customs duties or tariffs on certain imported goods.

Franchise taxes are taxes levied on the right to do business in the state.

Occupational taxes are applicable to various trades or businesses.

For example, buying a liquor license or getting

a taxi permit or paying fees to practice a profession within a state.

Finally, a very important tax in non-US jurisdictions is the value added tax.

This tax is present in most developed economies which basically

taxes the value added at various stages of production of products.

In effect this is a consumption tax because

the tax becomes embedded in the price of the product despite

the fact that various parties along the supply chain

technically remit the VAT payments to their respective governments.

The VAT is a good example of how tax incidence may fall on

a party that's not the same party that sends cash taxes to the government.

And all we can see that besides income taxes

there is quite a variety of other types of taxes.

Although our course will focus on the US federal individual income tax.

There are many many other taxes that exist and that you should be aware of.

Types of Taxes

Federal Taxation I: Individuals, Employees, and Sole Proprietors

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