Purpose & Types of Personal Taxes

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  • 0:01 Types of Personal Taxes
  • 0:47 Sales Tax
  • 1:32 Payroll & Income Tax
  • 3:01 Property Tax
  • 3:45 Capital Gains Tax
  • 4:32 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, you'll learn about five types of personal taxes: sales, payroll, income, capital gains, and property tax. We'll discuss the uses of each tax and provide examples.

Types of Personal Taxes

Julissa just received her Chartered Financial Planner (CFP) license. She's now certified to counsel individuals about personal finances. She schedules a meeting with her first client, Mrs. Beck, who recently moved to the United States. Mrs. Beck is interested in understanding how personal taxes will impact her household income. Julissa starts the meeting by explaining to Mrs. Beck that a tax is a percentage levied against goods or services, income, property, or investments. Who collects the tax and how the monies are utilized are dependent upon the type of tax.

For the rest of this lesson, we'll explore five different types of personal taxes: sales, payroll, income, capital gains, and property tax.

Sales Tax

Sales tax is a percentage levied by the state government against certain goods and services. Let's say Mrs. Beck purchases a new flat screen TV for $1,400 from an electronic store. The purchase price will be higher than $1,400 because she must pay sales tax. If the sales tax is 10%, she'll pay $1,540 ($140 of tax + $1,400 purchase price).

Julissa explains the electronic store is a custodian for the state, meaning it collects the sales tax from customers, then sends the monies to the state, usually quarterly. Sales tax revenue is used to pay for state governmental operations, state parks, jails, and hospitals.

Payroll Tax

Payroll tax is a percentage levied by the federal government against personal income. Payroll tax is comprised of two types of taxes: Medicare and Social Security.

Medicare is a federally funded social insurance program for retired Americans, while Social Security provides much broader services, such as retirement, disability, and death benefits. Paying into Medicare and Social Security is not optional. If you earn income and are not exempt, 1.45% and 6.2% will be deducted from your paycheck to pay for Medicare and Social Security, respectively, as of 2017. Julissa tells Mrs. Beck that similar to sales tax, the employer does not keep the payroll tax; instead, the employer is a custodian for the federal government.

Income Tax

Income tax also is a percentage levied by the federal government against personal income; however, the uses of income tax are different. Income tax is used for veteran's benefits, military, transportation, law enforcement, and much more.

Income tax is collected in two different ways: payroll deduction and lump sum payment. Employees can elect the dollar amount of tax to be deducted from their paycheck. However, if the amount of tax due is greater than the total dollar amount deducted from their paycheck, the employee must pay the deficit to the Internal Revenue Service, the tax collector, by April 15th. Interest and penalties are applied to the past due amount until it's paid.

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