Navigating the tax system can be challenging for everyone, whether you’re an adult who hasn’t paid much attention to paycheck deductions or a young person starting your first job. A crucial first step in managing taxes is knowing when to seek help, which begins with understanding what is and is not taxable.

Here are some key points to help you or someone you know better understand the basics of our tax system.

Understanding the different types of taxes

When you think about taxes, income tax is often the first to come to mind. Income tax is what you pay on the earnings from your job or from selling products and services. However, many other types of taxes exist. Here are some of the most common:

• Payroll Taxes: Unlike income taxes, which can fund various government programs, payroll taxes specifically support Social Security and Medicare. This tax amounts to 15.3% of most employees’ paychecks, but the employer typically covers half.
• Property Taxes: These taxes apply to property ownership, such as your home or vacation property.
• Sales Tax: This tax is levied on goods and services you purchase. While state and local governments primarily collect sales taxes, certain items, like gasoline, are also subject to federal sales taxes.
• Capital Gains Taxes: You may owe capital gains taxes if you sell an investment or property for a profit. Selling stocks, homes, or rental properties at a profit could trigger these taxes.
• Estate Taxes: These are taxes for the assets within your estate after you pass away.
• Inheritance Taxes: Unlike estate taxes, inheritance taxes occur when you inherit money or assets after someone else passes away.

Knowing that not all income is taxable

While most of your income is taxable, some forms of income are exempt from taxation:

• Interest from municipal bonds is generally tax-free
• Life insurance benefits often aren’t taxed
• Capital gains on the sale of your primary residence may be excluded up to a specific limit
• Estate tax exclusions mean only estates exceeding a set dollar amount are subject to tax
• Many employee benefits, such as health insurance, Health Savings Account (HSA) contributions, commuter benefits, and small employer-provided gifts, are tax-free

The tax rules governing these various types of income can be complex. That’s why having a professional guide you through your situation is often helpful. Having a basic understanding of how taxes work, though, will help you to ask the right questions. Contact our RRBB advisors if you have any questions.