Most people are already familiar with income taxes, since they’re required to file a tax return every year. But that’s just one piece of a bigger tax picture. Some taxes are automatically deducted from your paycheck or paid when you buy something from the store. Others only apply under special circumstances. Plus, you may not be taxed on all of your income, and the income you are taxed on may be taxed at a few different rates. This all gets a little confusing, so it can be helpful to have a firm grasp on how you’re being taxed, and where those taxes go. As you prepare your return this year, here’s a guide to the things that are taxable.
Income Tax vs. Other Tax
In addition to federal income taxes, most states — though not all — charge an additional state income tax, as do some municipalities and school districts. Here are some common taxes you might pay:
These taxes, also known as “employment taxes,” are automatically taken from your paycheck to pay for Social Security and Medicare. For the 2022 tax year, workers had to pay 6.2 percent of their first $147,000 of earnings toward Social Security, and 1.45 percent toward Medicare. Employers are required to match these amounts in both cases.
Sales taxes are collected as a percentage of a purchase of goods or services. They are charged only on the state and/or local level, and the tax rate varies from place to place. Some states have no sales tax, while others may levy a combined local and state sales tax upwards of 10 percent. Sales taxes are an example of a regressive tax, since lower earners end up spending a larger proportion of their earnings on them compared to higher earners.
Excise taxes are similar to sales taxes in that they are charged when you make a purchase. These taxes only apply to certain goods and services. These often include so-called “sin products,” such as alcohol and cigarettes. However, the most commonly paid excise tax is on gasoline, which is taxed by the federal government. Excise taxes are often applied on top of sales taxes.
Property taxes are levied on the state and/or local level, most often on real estate, but sometimes on other large purchases, such as vehicles. These taxes are calculated based on the property’s market value. Usually, they go toward local or county services, such as garbage collection, road maintenance, and fire protection.
These are taxes on the assets you pass on to your beneficiaries after your death, including cash, securities, insurance, real estate, and business interests. Not everyone has to pay estate taxes, though: For 2022, only estates worth more than $12.09 million were taxed (in 2023, it will be $12.92 million), and only the value of the estate that exceeds that figure is subject to taxation. Some states also charge their own estate taxes.
Gift taxes are similar to estate taxes, but apply to gifts you make to another person or entity while you’re alive. Only high-value gifts are taxed, and the annual gift exclusion allows you to make gifts at or below a certain value to as many people as you want. For 2022, the annual gift tax exclusion was $16,000 per recipient. For 2023, it’s $17,000.
Taxable vs. Nontaxable Income
In general, the income you receive from any source is subject to federal taxation. This includes wages, salaries, commissions, interest, stock options and dividends, unemployment compensation, rental income, and alimony. It also includes so-called “fringe benefits,” such as company-paid gym memberships, company vehicles, and holiday cash gifts from your employer. And it includes other forms of income, such as canceled or forgiven debts or loans, money from offshore accounts, property you obtained through barter, and payments from employer-paid disability or sickness and injury plans. A few types of income are exempt from federal taxes. Knowing these exceptions could potentially reduce your tax bill. Some of the most common forms of nontaxable income can include:
Inheritances, Gifts & Bequests
Most inheritances and gifts you receive are not taxed. Note, however, that taxes are owed on estates that exceed the federal exemption figure.
Life Insurance Payouts
Any money you receive from a life insurance policy when someone dies is nontaxable. If you cash out a life insurance policy, though, that money is generally taxable.
Qualified Scholarship Money
Note that while money from a qualified college scholarship is generally not taxable, any of that money that goes toward room and board is.
Other Nontaxable Income
Some of these sources include municipal bond interest, most health care benefits, child-support payments, welfare payments, and cash rebates on purchases. Reduce your taxes by taking advantage of the full range of exemptions and deductions.
A version of this article appeared in our partner magazine The Essential Tax Guide: 2023 Edition.