FEDERAL TAXES: TYPES AND DIFFERENCES WITH STATE - ECONOMY - 2024

The federal taxes are money used by the government of a country to pay for the maintenance and growth of the nation. They are considered as the "rent" charged for living in a country, or the appropriate rate for using the resources supplied by the nation.

These taxes are collected from individuals and corporations by the city, state or country where the corresponding entity resides or operates. When the taxes collected are credited to a country's government account, they are called federal taxes.

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No one enjoys paying taxes, but without them the government would not be able to provide citizens and businesses with the benefits and services it offers. For example, when you pay taxes to the US government, you are in effect investing in its economy.

The government uses the funds to build or maintain infrastructure, finance pensions and benefits for government workers, provide food and housing subsidies to the poor, improve sectors such as education, defense, health, agriculture, public services, transportation, etc.

What does it consist on?

The largest source of income for the federal government comes from the income of its residents. When people work for a company, group or for themselves, they are compensated for the services they provide.

They are mostly paid in cash, checks, or direct transfers to their bank accounts. Workers receive their compensation as net income.

This income is the total amount you have earned, less federal tax. This means that the company or the payer has withheld this lien to pay the government on behalf of the worker.

Gross income will then contain the total amount of income, with the worker having to pay the government what he owes.

Taxes for companies

A business must pay a variety of taxes based on its physical location, ownership structure, and the nature of the company.

These commercial taxes can have a great impact on the profitability of companies and on the amount of business investment.

Taxation is a very important factor in the financial investment decision-making process, because a lower tax burden will allow the company to lower prices or generate higher income. This income can then be paid in salaries and / or dividends.

Types

Income tax

It is the most common form of federal taxes. The government collects levies on any person or business that makes money during the year.

Tax laws provide a broad definition of taxable income, including all assets received. This is independent of whether they are earned at work, through a business, or by making good investments.

The laws also provide a wide range of credits, deductions and exclusions, which reduce the amount of taxes that must be paid.

Sales tax

It is a tribute that is based on a percentage established by the government to the sale prices of retail goods and services. It is collected by the merchant to pay it to the federal entity.

Technically, consumers are the ones who pay the sales tax. This is because this tribute increases costs to consumers and makes them buy less.

Value added tax

It is a federal sales tax, which is charged at each stage of production or consumption of a product.

Depending on the political climate, the tax authority often exempts certain basic necessities, such as food and medicine, from the tax.

Gift tax

The federal government imputes a taxation when certain donations are made to other people or entities. The tribute only applies to high-value donations made.

The laws allow reducing or eliminating the possibility of paying taxes with credits, exclusions and deductions.

Employment tax

The revenue that the federal government collects through this tax provides the funds necessary to operate social welfare programs, such as Social Security.

If you are an employee, these taxes will be deducted from your paycheck. The employer is also responsible for paying an equal amount on your behalf.

Unemployment tax

It is a federal tax that is assigned to state unemployment agencies to fund unemployment assistance for laid off workers.

Inheritance tax

Applies to donations made at death. This covers money and property left to heirs in a will, trust, or some other method.

Differences with state

The main difference between federal and state taxes is that federal taxes are collected by the national government essentially to pay its bills. On the other hand, state taxes are collected by individual states to pay their own bills.

These taxes also differ with respect to their rates and how they are applied, the types of income that are taxed, as well as the allowable tax deductions and credits.

The federal government covers the country as a whole. You get the money you spend primarily through federal taxes. About 80% of income comes from individual income tax and payroll tax, which funds Social Security programs.

State and local governments only comprise their own state, districts, cities, etc. For state governments, property taxes make up the largest revenue category at 35%.

Sales and gross income are in second place, close to 34%.

Federal and state income taxes

These taxes are determined by applying a tax rate to income subject to taxation.

For example, in the United States, retirement income is fully taxable by federal tax authorities, while several states partially or fully exempt retirement taxes.

There are also differences with respect to the bond interest tax. For example, interest received on savings bonds in the United States is subject to federal tax, but is exempt from state tax.

The federal tax system allows taxpayers to use standard or itemized deductions. Although most states also allow the same itemized federal tax deductions, some states impose certain adjustments.

The most common adjustment is to exclude federal deductions for state and local income taxes.

There are also differences regarding tax credits. For example, New York State allows a tax credit based on 20% of premiums paid for long-term care insurance. However, federal law rejects such tax credits.

References

1. Investopedia (2018). Federal Income Tax. Taken from: investopedia.com.
2. Intuit Turbotax (2018). What Are Federal Taxes? Taken from: turbotax.intuit.com.
3. Investopedia (2018). Types Of Taxes. Taken from: investopedia.com.
4. Andriy Blokhin (2018). What is the difference between a state income tax and a federal income tax? Investopedia. Taken from: investopedia.com.
5. Kevin Bonsor & Dave Roos (2018). How Income Taxes Work. How Stuff Works. Taken from: money.howstuffworks.com.