What Are the Different Types of Taxes?

Every April we have to go through filing federal income taxes, on our own or with the help of a tax accountant. Unless you happen to be a tax policy wonk, you probably don’t dwell too much on the theory and practice of taxation. While America’s tax code is notoriously complex, taxes break down into discrete categories that are easy to understand. However, to minimize how much taxes affect your finances, you may want to work with a financial advisor with tax planning expertise.

Income Taxes

Income taxes do what the name implies. They tax the income you earn. Federal income taxes are both progressive and marginal. Marginal means that there are different tax rates for different income brackets. The top earners pay a high tax rate, but only on the amount of money they have in that top bracket.

So if you’re paying taxes for 2025 (filed in April 2026) and you have $50,000 in taxable income, you will pay 10% on the first $11,925; 12% on your income between $11,925 and $48,475; and 22% on income between $48,475 and $50,000. Since the highest income bracket for you has a rate of 22%, you would say that you’re in the 22% bracket. However, that doesn’t mean the government taxes all your income at 22%, as tax rates in the U.S. are marginal.

Consumption Tax

A consumption tax is a tax on the money people spend, not the money people earn. Sales taxes, which state and local governments use to raise revenue, are a type of consumption tax. An excise tax on a specific good, such as alcohol or gasoline, is another example of a consumption tax. Some economists and presidential candidates have proposed a federal consumption tax for the U.S. that could offset or replace taxes on capital gains and dividends.

Progressive Tax

This is a tax that is higher for taxpayers with more money. In a progressive tax system like the U.S. federal income tax, wealthy individuals pay tax at a higher rate than less wealthy individuals. This is why wealthy Americans are taxed more than middle-class Americans and middle-class Americans are taxed at a higher rate than working-class Americans.

Regressive Tax

A regressive tax is one that is not progressive. This could either mean that the tax is lower for wealthy individuals or that the tax is flat (everyone pays the same rate). Why is a flat tax regressive? People with lower incomes would feel the effect of a flat tax more strongly than people with higher incomes. To a multi-millionaire, a 15% tax wouldn’t translate to a substantial decrease in quality of life. To someone making $30,000 a year, a 15% tax would mean a serious dent in spending power.

Proportional Tax

A proportional tax is the same as a flat tax. Taxpayers at all income levels would pay the same “proportion” in taxes. As explained above, proportional taxes are regressive taxes. These types of taxes are common in state-level sales taxes but not common at the federal level. Anyone who remembers the 2012 presidential campaign will remember a famous proportional tax proposal, the 9-9-9 Plan. That plan was for a 9% business transaction tax, a 9% personal income tax and a 9% federal sales tax.

VAT or Ad Valorem Tax

The VAT tax is big in Europe but the U.S. has yet to adopt it. It’s a tax on the “added value” of a product, the difference between the sales price and the cost of producing a good or service. It’s a form of consumption tax that buyers pay when they make a purchase, similar to a sales tax.

So what’s the difference between sales tax and VAT? Sales tax is paid by the purchaser of a product. Only that final stage in the product’s life is subject to taxation. VAT, in contrast, is applied at each stage of the supply chain and then snowballed into the final purchase price. If you travel to a country with VAT you probably won’t notice you’re paying it because it is included in the prices you pay. Sales tax, on the other hand, is listed separately on receipts.

Property Tax

Property taxes are taxes you pay on homes, land or commercial real estate. If you’re deciding whether you can afford to buy a home, you should take property taxes into account. Unlike a mortgage, property tax payments don’t amortize. You have to keep paying them for as long as you live in a home – unless you qualify for property tax exemptions for seniors, veterans or disabled residents.

Capital Gains Taxes

Capital gains taxes apply to investment income after an investment is sold and a capital gain is realized. Because so many Americans don’t invest at all, they don’t pay capital gains taxes. There are also taxes on dividends and interests stemming from simple interest from a bank account or dividends and earnings from investments.

Inheritance/Estate Taxes

Estate and inheritance taxes are paid after someone dies. An estate tax is paid from the net worth of the deceased. It’s a tax on the privilege of passing on assets to heirs. There is a federal estate tax, and some states levy their own estate taxes as well. Inheritance taxes don’t exist at the federal level and are only law in a handful of states. They’re taxes on the privilege of inheriting assets, and so are paid by the heir, not the estate of the deceased.

Payroll Taxes

If you take your annual salary and divide it by the number of times you get paid each year, chances are that number is higher than your actual paycheck. One reason could be that your healthcare premiums or 401(k) contributions are deducted from your paycheck. Another reason is payroll taxes. These taxes cover your contributions to Medicare, Social Security, disability and survivor benefits and to federal unemployment benefits. You’ll also have federal (and maybe state and local) income taxes withheld from your paycheck. You can learn all about payroll taxes here.

Types of Taxpayers

The U.S. tax system classifies taxpayers into two primary categories: United States persons and foreign persons, with distinct tax obligations for each.

United States Persons

A United States person refers to U.S. citizens, lawful permanent residents (green card holders), and those who satisfy the substantial presence test, which evaluates an individual’s time spent in the U.S. over a rolling three-year period. U.S. persons are subject to worldwide taxation, meaning they must report and pay taxes on all income earned, regardless of where it was generated. They may qualify for foreign tax credits or exclusions to mitigate double taxation.

Foreign Persons

A foreign person refers to nonresident aliens, foreign corporations, partnerships and certain trusts and estates. Unlike U.S. persons, foreign persons are taxed only on U.S.-sourced income. Income connected to a U.S. trade or business is taxed at graduated rates, while passive income – such as dividends or interest – may be subject to a flat 30% withholding tax, unless a tax treaty reduces the rate.

Bottom Line

There are many types of taxes in the U.S., and because taxes are here to stay, it’s nice to understand exactly the different types work. If paying taxes is a consistent source of stress for you, you may want to change your approach. That could mean starting earlier, using different tax preparation software or enlisting professional help, like a financial advisor with tax expertise.

Tips for Filing Your Taxes

• Your taxes are a major part of your overall financial plan. A financial advisor who offers tax planning and preparation services can be a valuable resource. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Plan ahead for tax season by calculating how much you’ll owe. SmartAsset offers several tax calculators, including a federal income tax calculator and a property tax calculator.
• Our annual roundup of the best tax filing software can help you get through this tax season as painlessly as possible.

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