Introduction

The average person doesn’t realize just how many types of taxes there are. They look at their paycheck, see several abbreviations, see numbers next to them indicating that taxes were taken out, and then go on with their day. They go to the store and buy a puzzle that says it’s $20, and when they check out, that puzzle is no longer $20. When they buy a house, they have to spend more money on top of the mortgage they are paying for at the end of the year. Every day, there appears to be extra costs on top of what you are already spending or receiving. That’s the hidden world of taxes!

The tax field can be very diverse, with many state and local governments deciding on their own tax structure. This article will dispel the fog and explain general tax rates, how many taxes there are, and when those taxes are imposed. We will also go over the different types of taxpayers.

Payroll & Income Tax

There is a sizeable difference between payroll and income taxes. Payroll taxes have several components where Social Security and Medicare are paid by both the employee and employer, Federal Unemployment Tax Act (FUTA) is only paid by the employer, and State Unemployment Tax Act/State Unemployment Insurance (SUI/SUTA) are paid by both employers and employees depending on the state. Income tax, however, is for federal, state, and local taxes, and only applies to the employees. The rates for each of these are:

Sales Tax

Sales tax is calculated as a percentage of the total purchase price on goods services. The tax can be imposed by state, local, or both depending on the location; some states tax both goods and services, others tax only goods, and some don’t tax either. According to the Tax Foundation, the “population-weighted average combined sales tax rate is 7.53 percent.”

Excise Tax

Excise tax is similar to sales tax in that it’s a tax on goods and services. The key difference is that excise tax is levied on specific goods and services whereas sales tax is on almost everything you buy. Some examples of things that have excise tax are cigarettes, alcohol, fuel, sports wagers, and a large list of other goods. At times, excise taxes are used to try to dissuade the public from certain goods such as cigarettes and alcohol. These taxes are commonly known as “sin taxes”.

While excise taxes are typically meant for businesses, they can be paid by the customer directly. These taxes are generally imposed by the federal and state governments but occasionally can be from local governments. Excise taxes can either be Ad Valorem or specific. Ad Valorem is a fixed percentage of purchases, while specific is a fixed dollar amount applied to purchases.

The rates vary but a few examples are:

• Pipe Tobacco: $2.83 per pound
• Beer: $3.50 per barrel for the first 60,000 barrels for a small brewer
• Cruise Ship Passenger: $3 per passenger

Capital Gains Tax

Whenever you sell an asset for more than you originally bought it for, a capital gains tax is implemented. The most common example of when you would see capital gains tax is on the sale of stocks. There are short-term and long-term gains when considering a stock sale. If you hold your investment for less than a year, it is a short-term gain. If you hold it for more than a year, it is long-term. In general, short-term gains are taxed at your ordinary income rate while long-term capital gains are taxed at either 0%, 15%, or 20% depending on your income rates.

Capital gains tax can also apply to real estate that you either hold as your principal residence or for investment. For single filers, $250,000 of the capital gains from the sale of a principal residence is excluded from taxable income. That amount increases to $500,000 for married and filing jointly. That means if you buy a home for $200,000 and then you sell it for $500,000, you will have to pay capital gains tax on $50,000 ($500,000 selling price – $200,000 original price = $300,000 profit – $250,000 excluded = $50,000 subject to capital gains).

Real estate investment properties can be more complicated because they can include depreciation deductions against the income you make from selling the property. For example, let’s say you purchase a property for $150,000 with a depreciation of $20,000, making the property’s taxable amount $130,000. Then you sell the property for $200,000. You would get taxed at the capital gains rate of $50,000 ($200,000 – $150,000), but you would also be taxed at your ordinary for the $20,000 that you depreciated. This is called depreciation recapture, which occurs when you sell an asset that you had depreciated down. You were able to get the benefits of depreciating the asset, but the IRS reclaims their dues when you sell the property.

One last capital gains tax is for collectibles which include art, jewelry, stamps, etc.  These are taxed at ordinary income tax rates for short-term gains while long-term gains are taxed at a cap of 28%.

Property Tax

Properties that are considered for property tax are generally immovable structures or land. However, property taxes can also be taxed on other personal property such as cars and boats. These taxes are levied by local governments and are their main source of income that helps fund schools, road construction, libraries, water and sewage, and other services that would create a betterment for their locality.

Property taxes are considered a regressive tax because they are applied at the same rate regardless of income. The tax rates differ depending on the city. The state with the highest effective tax rate in 2023 according to the Tax Foundation was New Jersey with 2.23%, while the state with the lowest effective tax rate was Hawaii at 0.27%.

Estate and Inheritance Tax

Estate taxes are imposed when a person passes and their estate changes owners. The entire estate is taxed, and the tax is applied before any assets are transferred to the inheritors. Most individuals won’t be assessed an estate tax as the federal estate tax exemption is $15 million for 2026. Therefore, if your overall estate is only worth $10 million, you wouldn’t have to worry about a federal estate tax. While most states don’t impose an estate tax, there are a few that do; the lowest exemption rate is in Oregon with an exemption limit of $1,000,000 in 2025, and the highest is in Connecticut with $13,990,000 in 2025. The tax rates can also vary from those states whether they are flat rates or progressive rates. The rates can range from 0.8% to 35% depending on the state.

Inheritance taxes differ from estate taxes because they are imposed on the beneficiary rather than the overall estate and generally are based on who received it and how much was received. This tax is also only imposed by states and not the federal government. There are 5 states that levy inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The exemption limits are generally lower with Pennsylvania having no exemption and Nebraska having the highest exemption of $100,000 in 2025. The tax rate ranges from 0% – 16%.

Gift Tax

Gift taxes are imposed by the federal government for when money or property is transferred to someone else without receiving something of value in return. Oftentimes these gifts are in the form of cash, real estate, or other types of property. For 2025, any gift over $19,000 would need to be reported to the IRS using Form 709. Exemptions also apply if giving money that goes towards tuition, qualified medical expenses, or giving directly to a spouse. If you do give more than the $19,000 and it isn’t exempt, the tax rate can range from 18% – 40% depending on the size of the taxable gift.

Duty Taxes

Duties are taxes on internationally transported goods and services. Governments impose these duties to protect domestic jobs, the flow of imported goods, and the overall economy. When importing goods, levies must be paid before the delivery happens. How much tax is imposed depends on a multitude of factors such as the country the goods are flowing into, international treaties, and total value of the goods.

License and Occupational Tax

License and occupational taxes are commonly levied by state and local governments as a condition for legally engaging in a particular profession or conducting business within a specified jurisdiction. These taxes typically apply to occupations and industries that require formal licensure, such as plumbing, barbering, gaming operations, and medical practice.

Such taxes are generally assessed on an annual basis and may be structured either as a fixed fee or as a percentage of gross receipts or revenue. In addition to professional and business licensing requirements, similar assessments may apply to motor vehicles, as all states impose vehicle registration or license fees as part of their regulatory framework.

Conclusion

There are numerous taxes in effect at any given moment, and being able to understand where your money is going can help you be a more conscious buyer and seller. Knowing the different taxes can also help business owners become aware of taxes they may not know they are supposed to be paying.

If you have any questions about taxes, Volpe Consulting & Accounting would be happy to assist!