In America, close to 30% of our income goes to taxes each year. There are many types of taxes, but two of the most common are undoubtedly taxes on our income and tax on our properties. So how do they differ?
Income tax is tax paid on income you make, whether as an individual or as a business. It is usually among the major sources of funds for the government and considered a fair form of taxation, collected only when you or your business has achieved enough success to afford taxes on the money you generate.
Income tax is collected federally and sometimes by your state. Federal taxes are based on your income, wages, and earnings within the span of a year. In most cases, income tax is taken from your paycheck; if you are self-employed, you have to estimate your quarterly tax payments. Most people tend to overestimate this amount, which is why they get tax refunds by the end of the tax year.
As with the federal government, your state may also impose an income tax. In the U.S., seven states do not collect income taxes, two states only tax interest, and dividends, while nine other states have a fixed flat rate. All the other states apply marginal tax brackets, although such brackets and income ranges vary. Some cities, counties or local governments may impose income taxes as well.
While income tax is voluntarily reported annually, the federal and state governments use complex codes for taxable and non-taxable income. Companies usually withhold tax money within the year from their employees’ paychecks and report earnings to the tax collector on W-2 forms at the end of the tax year, while forms known as 1099s may be used to report other income payments. With different income reports, tax agencies are able to determine people’s incomes. In most cases, income taxes are progressive, which means you pay taxes according to how much money you’ve made.
A property tax, also known as a millage rate, is paid on the value of a property and is commonly imposed on real estate. It is collected by the governing authority where the property is found, whether this authority is a national government, a county, a municipality, and so on. A single property may also be taxed may by more than one jurisdiction.
Property tax may be collected yearly or upon a real estate transaction, such as during a real estate transfer. Unlike a rent tax, property tax is computed based on rental income or imputed rent, as well as a land value tax that is based solely on the land’s value alone, excluding buildings or structures. In a property-tax system, every property to be taxed must be appraised for its monetary value, and that value will become the basis for assessing a proportionate tax for such property.
Property taxes can come in four types – land, improvements (man-made properties that are permanent), personal property (man-made properties that are movable) and intangible property. The terms “real property, realty or real estate” all refer to land and its improvements.
Property taxes can vary, depending on the jurisdiction. Real property is usually determined according to class, or the grouping of properties according to similar use. When properties are grouped under different classes, they will be taxed at different rates. Examples of property classes are commercial, industrial and residential.
There are cases in which a special assessment tax is confused as property tax and vice-versa. These two are, in fact, two separate forms of taxation. Property tax is based on the property’s fair market value, while a special assessment tax is dependent on a specific enhancement referred to as a “benefit.”
Taxes and The World Today
It’s part of our reality in the modern world – many taxes to pay and especially on our income and real properties. They affect our day to day-to-day lives without a doubt, and ultimately, our future. And while the different types of taxes we have to deal with are sometimes confusing, we need to pay them nonetheless.
Surely, with a clear definition and understanding of income tax and property tax – the two most common types of taxes we pay – it will be easier for us to manage our personal finances and create a better life for ourselves and our loved ones.