Whether you like it or not, taxes are an inevitable part of life. But you may not know why you pay them or where the money even goes.
The U.S. tax system can be seriously stressful, and things don’t always fit neatly into boxes. So Bottom Line Personal asked tax advisor and preparer Abby Eisenkraft to break down different types of taxes for us in the simplest way possible. Knowing how everything works can help you make better financial decisions—and avoid nasty penalties.
What Are Taxes?
Essentially, taxes are payments levied by governments on individuals and businesses. They’re typically used to fund public services such as education, infrastructure, defense, and social programs.
Taxes are mandatory, and you could face penalties and interest charges if you don’t pay them or file your return on time. Eisenkraft’s advice? Stay on top of things throughout the year: “The most important thing is that tax planning happens before December 31. Once the year closes, there’s very little I can do.”
Main Types of Taxes
Here are the major tax types in the U.S.:
Income Tax
This is generally applied to wages, salaries, business income, investments, and other earnings.
If you’re a salaried worker, you’ll see income tax listed on your paycheck. If you’re self-employed, you report your income when you file your tax return.
Eisenkraft says issues can arise when income isn’t properly reported: “We see a lot of off-the-books folks who think they’re slick and don’t report their income. And when they go to collect Social Security, what do they think that check is going to be? So, they’re not as smart as they think they are.”
Federal vs. State Income Tax
Federal income tax is levied on nearly all income earned by individuals in the U.S. Most states also have their own income tax—only nine states do not (though Washington does tax certain capital gains for high earners). This means two people earning the same salary may take home different amounts depending on where they live.
How Income Tax Is Calculated
Income tax is calculated based on your taxable income, which is the total amount you earn minus deductions and credits. For example, if your total income is $60,000 in a year and you have $10,000 in deductions, your taxable income would be $50,000.
Most people lower their taxable income by taking the standard deduction—$16,100 for single filers and $32,200 for married filing jointly in 2026—rather than itemizing individual deductions. But that’s not always the best choice.
So, when does it make sense to itemize rather than take the standard deduction? Eisenkraft explains that itemizing can be beneficial when your eligible deductions exceed the standard deduction. “For example, if your allowable deductions for mortgage interest, real estate taxes, state taxes paid, charitable donations, and medical expenses together are higher than your standard deduction, you would itemize instead.”
Progressive, Regressive, and Proportional Tax Structures
Tax rates, which are based on income brackets, are then applied to your taxable income to determine how much you owe. These rates can be structured in different ways:
- Progressive tax: Your tax rate goes up as your income goes up. This is the current structure used for federal income tax.
- Regressive tax: Those with lower incomes pay a higher percentage of their income in tax than those with higher incomes.
- Proportional tax: Everyone pays the same percentage of income in tax, regardless of how much they make.
This is why two people with the same income may owe different amounts depending on the type of tax structure in place.
Payroll Tax
This tax is typically deducted from an employee’s paycheck. But, as Eisenkraft explains, “Most people only look to see how much goes into their bank account and never look at what’s being withheld.”
What Payroll Tax Funds
Payroll tax is used to fund Social Security and Medicare, programs that support retirees and certain healthcare costs—together, these are known as FICA taxes.
Employers match an equal portion of the Medicare and Social Security taxes paid by employees, increasing the amount that’s contributed to these programs.
Self-employed individuals pay both the employee and employer portions of FICA tax through self-employment tax (15.3% — 12.4% Social Security + 2.9% Medicare).
Payroll Tax vs. Income Tax
Here’s the difference: Income tax is calculated on total taxable income, while payroll tax is tied specifically to wages and salaries to fund Social Security and Medicare.
Property Tax
Property tax applies to any real estate you own, including land. It’s an important source of funding for cities, counties, and other local governments.
How Property Taxes Work
Typically, a local government assesses how much a piece of real estate is worth and applies a tax rate called a “mill rate.” The higher your property value, the more tax you normally pay.
“Property tax is potentially deductible on your income tax if you itemize, so that’s something to be mindful of,” explains Eisenkraft. The deductibility cap raised 1% from 2025 to 2026 under the One Big Beautiful Bill Act, currently sitting at $40,400 for state and local taxes (SALT).
Who Pays Property Tax?
Property tax may be owed by:
- Homeowners
- Landlords
- Businesses
Sales Tax
This type of tax, also known as sales and use tax, applies to goods and services when you purchase them. For example, when you buy a product at the store or a meal at a restaurant, sales tax is added to the final price.
As Eisenkraft explains, sales tax is unavoidable. You must pay it automatically at the point of sale—and there’s no flexibility or way to negotiate it.
What Is Sales Tax?
It’s a percentage of the price when you purchase something. If a product is $10 and the sales tax rate is 8%, then the total amount you pay is $10.80 (8% of $10 is $0.80).
State and Local Variations
Sales tax varies depending on where you are, with different rates and surcharges levied by cities, states, and other authorities.
For instance, New York City charges a rate of 4.5%, New York State charges a rate of 4%, and the Metropolitan Commuter Transportation District charges a surcharge of 0.375%. If you purchase something in New York City, you may have to pay a total of 8.875%, depending on what the product or service is.
Five states have no sales tax—Alaska, Delaware, Montana, New Hampshire, and Oregon. Note: Some local areas in Alaska still charge sales tax, even if it’s nonexistent at the state level.
Capital Gains Tax
If you sell stocks, bonds, real estate, or other investments, you may have to pay capital gains tax on the profits. Not everyone knows this, and it can catch people off guard.
Short-Term vs. Long-Term Capital Gains
The tax rate you pay on capital gains depends on how long you hold an asset before selling it:
- Short-term capital gains: Assets held for one year or less are taxed as regular income.
- Long-term capital gains: Assets held for more than one year are typically taxed at lower rates.
Federal long-term capital gains rates are 0%, 15%, or 20%, depending on income.
When You Owe Capital Gains Tax
You likely owe this tax if you sell an asset at a profit, meaning you made more money than you paid for it. For instance, if you buy a stock for $100, and it later sells for $150, you may have to pay capital gains tax on the $50.
“I’ll give you an example,” says Eisenkraft. “A client came crying to me, asking why they owe so much. I said, ‘You bought Apple stock like 10 plus years ago, and now you have a $70,000 long-term capital gain.’ That’s generally taxed at a lower rate, so it’s not so bad. But even if it were 20%, they weren’t planning on that extra $14,000.”
It’s worth noting for homeowners, however, that there’s a $250,000 / $500,000 primary residence exclusion on capital gains from a home sale based on your filing status—with up to $500,000 for married filing jointly.
Estate and Inheritance Taxes
Estate and inheritance taxes apply to any wealth that’s transferred after someone passes away.
As of 2026, twelve states and the District of Columbia have an estate tax, while five states have an inheritance tax. Note that Iowa eliminated its inheritance tax in 2025, bringing the number down from six. Maryland is the only state with both.
Key Differences
So, how do these taxes differ?
- Estate tax: This is paid by the deceased person’s estate before assets are distributed.
- Inheritance tax: This is paid by the person receiving the assets.
Who Is Affected?
Estate and inheritance taxes usually have high thresholds, meaning only estates with high net worths may pay them. For example, in 2026, the federal estate exemption threshold rose to $15 million per individual.
“Very few regular folks have to deal with this, and it changes all the time,” says Eisenkraft. “If you’re in a situation where there’s a high-net-worth person who passes, you want to deal specifically with a tax person who specializes in that.”
Excise Tax
Excise taxes, sometimes referred to as “sin taxes,” are only levied on specific goods. They are generally included in the final price of the item rather than being added at checkout.
Common Examples
Goods subject to excise taxes include:
- Gasoline
- Tobacco
- Alcohol
- Heavy trucks
- Airline tickets
- Indoor tanning
Sin Taxes and Their Purpose
Many excise taxes apply to goods that may be considered dangerous to individuals or society, such as alcohol. They are designed to generate additional revenue for the government.
Other Notable Taxes
There are some other types of taxes that you should know about:
Corporate Tax
Corporations in the U.S. must pay tax on their profits. The federal corporate tax rate is a flat 21%. This tax is applied to a company’s taxable income after expenses and deductions have been accounted for.
Luxury Tax
This is levied on high-end goods and services that are not considered essential, such as:
- Expensive vehicles
- Private jets
- Designer clothing
- Luxury jewelry and watches
The U.S. doesn’t have a federal luxury tax anymore. However, some states and local governments may impose higher tax rates on specific purchases. For example, Washington State has a luxury tax on high-value vehicles and noncommercial aircraft.
Tariffs
A tariff is a tax on goods imported from other countries.
During the Trump administration, tariffs were used more extensively to protect U.S. industries and encourage domestic production. This led to higher costs on some imported goods, such as steel and aluminum. In response to these changes, other countries placed tariffs on U.S. goods. Whatever you owe, it’s best to check your tax situation regularly.
“If you can catch stuff during the year, you can fix it during the year,” says Eisenkraft. “Just look at your stuff and make sure it’s right, even if it’s once a month.”
Key Takeaways
- Taxes aren’t just something you deal with once a year. They affect how much you take home in your paycheck, how much things cost in the store, your investments, and your retirement.
- What you pay in taxes depends on how much you earn, your location, and other factors. Two people with the same income may pay different amounts in tax. Deductions and credits can lower the amount you owe.
- Understanding different types of taxes can help you plan your finances and avoid penalties and interest from the IRS and local authorities.
