Types of Taxes: Everything You Need to Know

If you think the only time you have to worry about taxes is April 15, think again. The truth is, taxes are part of everyday life. Hardly a day goes by when you’re not paying some kind of tax to some government entity.

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Did you make a run to Walmart or Target? Take a look at your receipt—you probably paid some kind of sales tax.

When your paycheck hits your bank account on Friday, check your pay stub. You’ll probably see that your employer withheld some of your hard-earned money to pay your fair share of income tax.

Are you selling that rental property that’s become more of a headache than it’s worth? Surprise! You’re probably going to pay capital gains tax on any profit you make from the sale.

You can run but you can’t hide from the tax man.

There are lots of different types of taxes out there coming from all different directions, so it’s important to have a basic understanding of what taxes you owe and when you’re expected to pay up. 

What Exactly Is a Tax, Anyway?

In a nutshell, taxes are mandatory payments collected by a government from individuals or businesses to help keep the government running.

No one loves paying taxes, but taxes do provide the money necessary to fund important government services and benefits (well, for the most part). Tax revenues fund everything from Social Security benefits and military spending at the national level to building schools and fixing that annoying pothole on the highway (eventually) at the local level.

Paying taxes is just one of the many responsibilities that come with being a contributing citizen. You will pay taxes to someone, somewhere. But the real question is, how will you get taxed?  

What Are the Main Types of Taxes?

Taxes come in all shapes and sizes, but they can be boiled down to the following categories:

• Income taxes
• Consumption taxes
• Property taxes
• Payroll taxes
• Capital gains taxes
• Wealth transfer taxes

Think of this as your “cheat sheet” for your taxes, a 30,000-foot view of the tax landscape and all the creative ways the government came up with to take money out of your pocket.

Income Taxes

Let’s start with the primary source of revenue for the federal government (and many state governments too): the income tax.

An income tax is a tax that governments charge on the income you earn, which includes wages, interest income and even some Social Security benefits. Generally, income taxes account for most of the taxes you’ll pay each year—the more you earn, the more you’ll pay.

Federal Income Tax

When people talk about taxes, chances are they’re probably talking about income taxes.

Federal income tax is a tax the U.S. government collects from money earned by individuals—or from profits made by businesses—throughout the year. How much you pay in taxes depends on how much money you make in a year.

But not all your income is taxed at the same rate. Long story short, there are tax brackets that determine your tax rates (which range from 10–37%), and how much you’ll pay depends on the tax bracket you’re in.¹

If you’re in the 24% tax bracket, for example, not all your income will be taxed at 24%. Some will be taxed at 10%, some at 12% and 22%, and the last bit of your income will be taxed at 24%. That’s why our tax system is called a progressive tax system.   

State and Local Income Tax

Uncle Sam isn’t the only one wanting a piece of your income—your state (and possibly even your city or county) might want its own slice of the pie too. Most states collect their own income tax on top of what you owe the federal government.

States have their own variations of tax rates and filing requirements. For example, Louisiana has a flat tax rate of 3%—which means everyone in the state has to pay 3% regardless of how little or how much they make. On the other hand, California has a progressive tax structure (much like the federal one), with tax brackets ranging from 1–13.3% depending on your income.²

And several states have no state income tax at all. Instead, they raise revenue through different types of taxes—including sales tax and property tax.

Consumption Taxes

Consumption taxes are taxes on goods and services. Unlike income taxes, which are based on what you earn, consumption taxes are based on what you spend (or consume).

There are three main types of consumption taxes: sales tax, excise tax and tariffs.

Sales Tax

A sales tax is a consumption tax that governments (usually state or local) charge on the sale of goods and services. In other words, it’s a tax on the things you buy, not on the money you earn or save.

The sales tax is usually set as a percentage of the purchase price that gets added at the register when you buy something. For example, if there’s a 10% sales tax in your state and you buy a $100 espresso machine, you’ll pay a total of $110 ($100 sales price plus 10% sales tax) when you buy it.

The customer ultimately pays the tax when making a purchase. The business collects the tax at the point of sale and then sends it to the government. The tax rate depends on the state (and sometimes the city or county you’re in). In some places, the sales tax could be around 6%, while in others it might be over 10%.³

Excise Tax

An excise tax is another type of consumption tax, but it’s placed only on specific goods or activities. While a sales tax usually applies to most (or all) products and services in a particular area, excise taxes are usually very targeted and make up only a small portion of tax revenue for state and local governments.

The most common example of an excise tax is a “sin tax,” which is levied on certain goods and activities seen as harmful or costly to society—think cigarettes, sodas, alcohol and gambling (including sports betting).  

Tariffs

A tariff is a tax imposed by a government on goods imported from another country. Tariffs are paid by companies that import the goods, either as a percentage of the product’s value (ad valorem tariff) or as a fixed fee per item (specific tariff). The revenue made from tariffs goes to the government of the importing country. 

When a tariff is placed on a country or on specific items from all over the world, it acts like a consumption tax by increasing the cost of the imported goods. Importers will often pass those costs on to consumers in the form of higher prices—meaning you ultimately pay for most of the tariff at checkout.  

Property Taxes

It’s not enough for the government to tax your income and your spending. Some governments want to tax your stuff too. So if you own a house, a car, a boat or a business, listen up—because you might have to pay property taxes on some (or all) of those assets.

Real Property Tax

Real property tax is a tax on any real estate you own. That includes land and any permanent buildings or structures on that land, like your house, apartments or condos, and commercial buildings.

This tax is usually paid to local governments (your city, county or school districts, for example). And it’s often a major source of revenue to finance public services like schools, road repairs, and police and fire departments.

If you own a home or property, property taxes come with the territory, so make sure you’re budgeting for this expense. The good news is, property tax is usually collected as part of your mortgage payment. That makes it easy to pay what you owe so you don’t have to worry about the local authorities knocking on your door to collect.

Personal Property Tax

A personal property tax—also known as a tangible personal property (TPP) tax in some business circles—is a tax on assets that can be moved or touched, such as business equipment, inventory, cars and furniture.  

In most cases, businesses—not individuals—pay personal property tax.

Payroll Taxes

Payroll taxes are taxes withheld from an employee’s paycheck and primarily used to fund social safety net programs—including Social Security, Medicare and unemployment insurance.

The most common payroll taxes in the United States are Federal Insurance Contributions Act (FICA) taxes, which include Social Security and Medicare taxes.

Social Security Tax

The Social Security tax is a mandatory payroll tax used to provide benefits for current retirees, the disabled, and surviving spouses and children. Currently, it’s a 12.4% tax that’s split equally between employers and employees (6.2% each). If you’re self-employed, you’re on the hook for paying both the employee and employer portions, for a total of 12.4% of your net earnings.⁴

Medicare Tax

The Medicare tax is used to fund the national health insurance program for people 65 and older. It’s a 2.9% tax that’s also split equally between employer and employee (1.45% each), just like the Social Security tax. And there’s an additional 0.9% Medicare tax for high-income earners with wages greater than $200,000.⁵

Capital Gains Taxes

This one’s for all you investors out there. Capital gains tax is a tax on the profit you make from the sale of a capital asset such as real estate, stocks, mutual funds or bonds. (Note: You do not have to pay capital gains tax on investments held inside tax-advantaged retirement accounts. Those get special tax treatment!)

Keep in mind, your capital gains tax rate depends on how long you owned the investment before you sold it for a profit. How much you’ll be taxed basically depends on this question: Did you hold the investment for more than a year before you sold it?

Short-Term Capital Gains Tax

An asset is considered short-term if you held it for a year or less before selling it. Short-term capital gains are taxed as ordinary income. That just means they’re added to your other income (like wages) and subject to your regular federal income tax bracket—anywhere from 10–37%.

That’s just one of many reasons we recommend a buy-and-hold investing strategy—because trying to make a quick buck in the stock market or by house flipping could significantly increase your tax bill.

Long-Term Capital Gains Tax

If you held your investment for more than one year before selling it, congratulations—you have long-term capital gains. Long-term capital gains are subject to special lower tax rates than ordinary income, which is designed to encourage long-term investing.

Currently, long-term capital gains are taxed at 0%, 15% or 20%.⁶ The rate you pay depends on your overall taxable income and filing status. These lower rates are great because they allow you to keep more of your investment profits. You see? Patience pays off! 

Wealth Transfer Taxes

Did you think we were done with taxes? Oh no, friends. You might be done with taxes, but taxes are never done with you—not even when you pass on from this life to the next. The last stop on our tax journey is a category of taxes called wealth transfer taxes.   

Estate Tax

The estate tax (sometimes lovingly referred to as the death tax) is a federal tax on the value of everything you plan to pass down to your loved ones when you die—from cash, investments and real estate to businesses and personal property. The tax is paid out of your estate before it’s passed down to your loved ones and other beneficiaries.

But don’t worry—there’s a good chance that most (if not all) of your estate’s value is exempt from the federal estate tax. For 2025, the estate tax exemption is $13.99 million per individual (or $27.98 million for married couples).⁷ Estates worth more than that might be subject to a federal estate tax, which currently has a maximum rate of 40%.⁸

Inheritance Tax

Unlike the estate tax, which is paid by the estate based on how much it’s worth, an inheritance tax is paid by the beneficiaries based on what they receive.

Thankfully for your loved ones, there’s no inheritance tax at the federal level. But these five states do have an inheritance tax of some sort: Nebraska, Kentucky, Pennsylvania, New Jersey and Maryland (which is also the only state with both an estate tax and an inheritance tax).⁹ 

Gift Tax

If you have a large estate, you might be thinking, Well, what if I start passing on my stuff to my loved ones before I die? Sorry . . . the government is one step ahead of you with the gift tax.

The gift tax is a federal tax on money or property you give to someone without getting something of equal value in return. The good news is, there’s also an exclusion to this tax. For 2025, the annual gift tax exclusion is $19,000 per recipient.¹⁰ This means you can gift up to $19,000 to as many people as you want without reporting it to the IRS or paying any taxes on the gifts. 

Taxes Don’t Have to Be Complicated

If you feel like your head is spinning after reading all that, we get it. There are lots of taxes to keep track of!

But no matter how straightforward or complex your tax situation is, we want to make it easier to navigate so you can focus on the stuff that matters to you the most.

With access to tax professionals, easy-to-use tax software, tax checklists and more, our tax resources page has everything you need to get a better handle on your taxes.