Jonah Patel
Direct tax is a tax paid directly by an individual or organization to the entity that imposed the tax levy, such as the US government. It is progressive in nature, meaning that the tax burden increases with income. Direct taxes are computed based on the taxpayer's ability to pay, and they are non-transferrable. Examples of direct taxes include income tax, corporate tax, property tax, and taxes on assets.
| Characteristics | Values |
|---|---|
| Paid by | Individual or organisation |
| Paid to | The entity that levied the tax, such as the government |
| Examples | Income tax, corporate tax, property tax, gift tax, capital gains tax, estate tax, personal property tax, taxes on assets |
| Nature | Progressive |
| Calculation | Based on the ability-to-pay concept |
| Tax burden | Increases with income |
| Apportionment | Required |
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What You'll Learn
Income tax
In the United States, the distinction between direct and indirect taxes came about with the ratification of the 16th Amendment to the U.S. Constitution in 1913. Before this amendment, direct taxes had to be apportioned to a state's population, making it difficult for the federal government to impose direct taxes such as personal income tax. However, the 16th Amendment changed the tax code and allowed for the levying of numerous direct taxes, including federal income tax.
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Corporate tax
The incidence of corporate taxation is a subject of debate among economists and policymakers. While evidence suggests that some portion of the tax burden falls on owners, workers, shareholders, and consumers, the ultimate incidence is unresolved. Some studies indicate that the burden falls more on capital, especially in large open economies like the United States, while others suggest that it falls more on labour.
It's worth noting that corporations may face double taxation, where both the corporation and its owners are taxed. However, this can be mitigated by registering as an S corporation in the United States, where income passes through to business owners who are then taxed through their individual tax returns.
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Property tax
In some cases, property taxes may also be imposed on personal property, such as vehicles, boats, or aircraft. These taxes are typically separate from real property taxes and may have different rates and exemptions. Personal property taxes are often levied by state or local governments and used to fund specific services or projects.
It is important for property owners to understand the property tax system in their area, including the assessment process, payment methods, and due dates. Property tax bills are usually sent out annually, and failure to pay on time can result in penalties and interest charges. Property owners should carefully review their tax statements and seek clarification from the relevant government office if they have any questions or concerns.
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Capital gains tax
The tax rate applied to capital gains depends on the taxpayer's income level and the duration for which the asset was held. Short-term capital gains refer to assets held for a year or less, while long-term capital gains refer to assets held for more than a year. Short-term capital gains are taxed as ordinary income, with rates ranging from 10% to 37%. On the other hand, long-term capital gains are taxed at 0%, 15%, or 20%, depending on income level and filing status. For high-earning individuals, an additional 3.8% net investment income tax may apply.
It's important to note that capital gains taxes are progressive in nature, meaning that the tax burden increases with income. This results in high-income individuals bearing a disproportionate share of the tax burden, while those with lower incomes face a relatively smaller tax burden.
To calculate capital gains or losses, one must determine the difference between the adjusted basis in the asset and the amount realized from the sale. The adjusted basis is typically the cost of the asset to the owner, but it can vary if the asset was received as a gift or inheritance. Capital gains and losses are then classified as long-term or short-term, impacting the applicable tax rates and considerations.
In summary, capital gains tax is a direct tax applied to the profits from the sale of capital assets. The tax rates depend on factors such as income level, filing status, and the duration for which the asset was held. Understanding these factors is crucial for proper tax compliance and strategic financial decision-making.
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Gift tax
A direct tax is a tax paid directly by an individual or organisation to the entity that levied the tax, such as the US government. Direct taxes include income taxes, corporate taxes, property taxes, and taxes on assets.
There are some gifts that are not considered taxable gifts. These include gifts that are not more than the annual exclusion for the calendar year, tuition or medical expenses paid for someone else, gifts to a spouse, and gifts to a political organisation for its use. Gifts to qualifying charities are also deductible from the value of the gifts made.
The annual gift tax exclusion is $19,000 in 2025. This means that an individual can give up to $19,000 to any number of people without having to report it to the IRS. If the annual exclusion amount is exceeded, a gift tax return must be filed in addition to the federal tax return the following year. However, this does not necessarily mean that taxes must be paid, as there is also a lifetime gift tax limit. If the value of the gift exceeds this limit, then taxes must be paid. Gifts between spouses are unlimited and generally do not trigger a gift tax return.
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Frequently asked questions
A direct tax is a tax paid directly by an individual or organization to the entity that imposed the tax. This could be federal income tax, corporate tax, or property tax.
Direct taxes are calculated based on the taxpayer's ability to pay. This means that the higher the income, the higher the taxes.
Direct taxes promote equality among payers and citizens as they are based on the individual's ability to pay. They are also determined and made final before they are paid, and the government does not need to spend on their collection as they are taken directly from the source of income.
