List of Taxes We Pay: Federal, State, and Local

A tax is a compulsory financial contribution levied by a government to fund public expenditures like roads, schools, national defense, and social programs. These mandatory payments are the primary source of revenue governments use to provide public services and maintain infrastructure, enabling the government to fulfill its responsibilities to its citizens.

Taxes Levied by the Federal Government

The United States federal government imposes several types of taxes on individuals and businesses nationwide. These taxes are the main source of revenue for the national government, funding a wide array of federal programs. The Internal Revenue Service (IRS) is the agency responsible for collecting these taxes and enforcing tax laws.

Individual Income Tax

The individual income tax is levied on an individual’s total income, including wages, salaries, and investment returns, and it is the largest source of federal revenue. The U.S. uses a progressive tax system where income is divided into brackets, and higher portions of income are taxed at increasingly higher rates.

Taxpayers can reduce their taxable income with either a standard deduction or by itemizing deductions. The standard deduction is a fixed dollar amount that varies by filing status and other factors. Itemized deductions are specific expenses that can be deducted, such as state and local taxes up to $10,000, home mortgage interest, and charitable contributions. Tax credits, like the Child Tax Credit, are also available and directly reduce the amount of tax owed.

FICA Taxes (Social Security and Medicare)

The Federal Insurance Contributions Act (FICA) is a payroll tax funding Social Security and Medicare, deducted directly from an employee’s paycheck. Employers must withhold these taxes and contribute an equal amount. The Social Security tax is 6.2% for both the employee and employer on wages up to an annual limit, which is $176,100 for 2025. The Medicare tax is 1.45% for both the employee and employer, with no wage limit. High-income earners may also be subject to an Additional Medicare Tax of 0.9% on earnings above a certain threshold.

Capital Gains Tax

A capital gains tax is levied on the profit from selling a non-inventory asset, such as stocks, bonds, or real estate, and is only incurred when the asset is sold. The tax rate depends on how long the asset was held.

Short-term capital gains, from assets held for one year or less, are taxed at an individual’s ordinary income tax rates. Long-term capital gains, from assets held for more than one year, are taxed at lower rates of 0%, 15%, or 20%, depending on taxable income.

Estate and Gift Taxes

Estate and gift taxes apply to the transfer of wealth. The estate tax is levied on a person’s assets after death, while the gift tax applies to valuable items given during the giver’s lifetime.

These taxes affect a small percentage of the population due to a high exemption amount. For 2025, an individual can transfer up to $13.99 million without incurring the tax. Any amount transferred above this exemption is subject to a federal tax with a top rate of 40%.

Federal Excise Taxes

Federal excise taxes are indirect taxes on the sale of specific goods or services, paid by the producer or merchant and included in the consumer’s final price. Common examples include gasoline, tobacco products, alcoholic beverages, and airline tickets.

Revenue from these taxes often funds specific services; for instance, the federal gasoline tax helps fund the Highway Trust Fund for highways and mass transit. The tax rates vary widely by product.

Federal Unemployment Tax (FUTA)

The Federal Unemployment Tax Act (FUTA) imposes a payroll tax on employers to fund state workforce agencies and unemployment programs. The tax is paid only by the employer and is not deducted from employee wages.

The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers can receive a tax credit of up to 5.4% for paying state unemployment taxes on time, which can reduce the effective FUTA rate to 0.6%.

Common Taxes Levied by State Governments

State governments levy their own taxes to fund public services like education, transportation, public safety, and healthcare. These taxes vary significantly from one state to another in type, rate, and what is taxed.

State Income Tax

Many states impose an income tax on individuals and corporations. State income tax structures are either progressive, with rates that increase as income rises, or a flat tax system, where a single rate applies to all income levels.

A number of states do not levy a personal income tax and rely more on other taxes for revenue.

State Sales Tax

A state sales tax is applied to the sale of goods and services, collected by the seller, and remitted to the state. Most states impose a sales tax, though rates and taxable items differ substantially.

Many states exempt necessities like groceries and prescription medications to lessen the tax burden, but specific exemptions vary widely.

State Estate and Inheritance Taxes

Some states impose their own taxes on the transfer of assets after death, separate from the federal estate tax. These fall into two categories.

An estate tax is paid by the deceased’s estate based on its total value before assets are distributed. An inheritance tax is paid by the person who receives the inheritance, with rates often depending on the heir’s relationship to the deceased. A minority of states levy either tax.

Other Common State Taxes

States use other taxes to generate revenue, such as vehicle registration fees. These are paid annually and can be a flat rate or based on the vehicle’s age, weight, or value, with revenue often funding transportation.

States also impose their own excise taxes on products like gasoline, tobacco, and alcohol, in addition to federal excise taxes. The rates for these state-level taxes vary significantly.

Taxes Levied by Local Governments

Local governments like counties, cities, and school districts levy taxes to fund community services, including public education, law enforcement, fire protection, and maintenance of local parks and roads. The types and rates of local taxes are determined by local officials and vary greatly by jurisdiction, even within the same state.

Property Taxes

Property taxes are the most important revenue source for local governments and are levied on real estate. A local assessor determines a property’s value, which is then multiplied by a tax rate (or millage rate) to calculate the tax owed.

Revenue from property taxes is the primary funding source for public school districts and also funds services like police and fire departments, libraries, and street maintenance.

Local Sales Taxes

In many states, local governments can impose their own sales taxes in addition to the state sales tax. These are collected with the state tax, meaning the total sales tax rate can vary between cities or counties within the same state.

The authority for local governments to levy sales taxes and the maximum rates they can charge are determined by state law. Revenue from these taxes funds the specific city or county that imposes them.

Local Income or Occupational Taxes

Some local governments levy their own income taxes on the wages of individuals who live or work within the municipality. These are often a flat rate applied to all earned income.

In some areas, a local government may instead impose an occupational privilege tax. This is a flat annual fee paid by anyone working within the jurisdiction, regardless of income level.