The Basics of Taxation

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With the ongoing changes to the tax code, we sometimes forget what it is we're changing. This article takes us back to the basics.


The official Merriam-Webster definition of tax is: a charge, usually of money, imposed by authority on persons or property for public purposes. That being said, taxes come in all sorts of sizes and shapes, but here's a list of a few...


Federal Income Tax


  • Filed annually for both individuals and businesses
  • Individual taxes due 4/15 of every year with optional 6-month extension
  • Business taxes - Partnerships and S corporations due 3/15 of every year with optional 6-month extension (calendar year C corporations are due 4/15 of every year with optional 6-month extension)
  • Overseen by Internal Revenue Service
  • Tax rates are progressive, running from 0% up to 37% for individuals (flat tax of 21% for C corporations)


State and Local Income Taxes


  • Unless you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming, expect to pay an additional tax of up to 13.3% (California)
  • For NYC residents, expect to pay an additional tax of up to 3.876% on top of the NYS tax rate of up to 8.82%




  • If you're an employee, these are withheld from your paycheck by your employer
  • 6.2% tax to cover Social Security for the first $132,900 in earnings
  • 1.45% tax to cover Medicare - sorry, no limit
  • Additional 0.9% Medicare tax for wages in excess of $200,000 ($250,000 if married)


Self-Employment Tax


  • If you're self-employed, you have to pay the FICA tax...TWICE! (total of 15.3% of your income; 12.4% for Social Security and 2.9% for Medicare)
  • Good news! 50% of your self-employment taxes are deductible on your personal tax return


Capital Gains Tax


  • Tax on your net gains when you sell your assets (investments, real estate, collectibles, etc.)
  • Short-term rates apply if you held assets for one year or less (rates are same as regular ordinary income)
  • Long-term rates apply if you held assets for more than one year (federal rates can be 0%, 15% or 20%, depending on your income)


Estate Tax


  • Finally, a tax that you don't have pay for personally
  • Paid by your estate if certain thresholds are met
    • Federal - $11.4 million per individual for 2019
    • State (NY) - $5.74 million per individual for 2019
  • Maximum federal tax rate is 40%
  • Maximum NYS tax rate is 16%


Gift Tax


  • Can give away up to $15,000 (2019) per person to anyone annually (literally anyone, i.e., relative, neighbor, friend, or stranger)
  • Any amounts above that will reduce your lifetime estate exemption


Property Tax


  • Assessed by local government
  • Based on value of property (ad valorem)


Sales Tax

  • Assessed on state and local level
  • Tax on goods and services at point of sale
  • NYS/NYC combined sales tax rate is 8.875% (4% NY, 4.5% NYC, and 0.375% for MTA)


Value-Added Tax


  • Tax applies at each stage of the production process
  • Based on the value that has been added to the product
  • U.S. does NOT have this tax (very common in Europe)


Other taxes include excise taxes (i.e., 7.5% on plane tickets, 18.4 cents for gasoline per gallon), and tariffs (tax on imported goods)


"America is a land of taxation that was founded to avoid taxation." - Dr. Laurence J. Peter




In April, we alerted you about increases to the New York State "Mansion Tax" for properties sold in New York City (LMC Tax Alert 4/21/19). The new law goes into effect July 1. New York just issued a memo with full details and many examples. Readers wishing more information about the changes can click here.


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