 Hello and welcome to this session in which we will discuss the different types of taxes We're gonna break down the taxes in the United States under different under three different categories Hello and welcome to this session in which we will discuss the three different types of taxes in the United States Which are property taxes transaction taxes and income taxes Now when you think of taxes the first thing you think of is income taxes Which is taxes that you pay on your income on your earnings whether you are an employee or a self-employed individual But there are many other taxes that government state local and federal impose on us such as property taxes Transaction taxes in this session we will focus on property taxes and transaction taxes and Property taxes will be taxes on personal property based on the value at Valoran like property and personal Under transaction taxes. We're gonna look at various federal state and local excise taxes Estate taxes, which is kind of part of excise taxes as well as gift taxes sales tax and use tax The main course is about income taxes. However, we do cover the state taxes and gift taxes in separate chapters So we're gonna start by discussing property taxes. Let's go ahead and get started Before we proceed any further I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam Miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of Lectures multiple choice questions true false questions as well as exercises. Go ahead start your free trial today Property taxes. What are property taxes property taxes also known as Ed Valorum? It's means based on the value. It's a form of a wealth based tax It means the higher the value of that property wherever that property happens to be usually when we think of property taxes We think of taxes on property on homes that you own Property taxes are levied usually on buildings homes and land also. That's property and in some state proper ad Valorum, which is taxes based on property is also subject to Personal property which is other than land and building and that's very important It's not an old state and it's very important to determine whether the tax is a Ed Valorum property tax. Why because it is indeed a property tax based on the value of the asset Then it could provide you a deduction for the federal income taxes Well, when you pay taxes on your home, you can get a deduction on your schedule a itemized deduction You can if you happen to iconize now in some state if you pay Taxes on certain personal property based on the value of that property. That's also deductible Now, why do state and local government use this type of revenue this type of taxes It's a form of revenue and usually what they do is they use this revenue usually the finance the school district So property taxes finance the school district and it's a major social source of revenue for many cities counties in the United States What are the property the property taxes real property taxes generally encompass real estate? So when we think of property taxes, you think of real estate building and fixtures Which are items so integrated into the property that Removing them can cause damage. So when we think of loud property It's something that cannot be moved from one place to the other a car You could always move it from one place to the other a home an office building cannot be moved For example a built-in bookcase and installed electrical wiring are fixture But a movable fix bookcase is not so if you have a bookcase if it's in the wall Fixed in the wall and you cannot move it if you move if you sell this house It's part of the property If it's a bookcase where you can move if you happen to sell the house and move then it's a personal property And how assets are defined again matters for taxation Especially in places without this add valorem tax on personal property because if it's not add valorem It's not tax on value then it's not deductible So in some states you do have add valorem tax on personal property that could apply to vehicles boats That are owned by individuals So when you pay your taxes on the vehicle that tax is deductible as long as it's based on the value of the asset Let's move now to transaction taxes transaction taxes applies to various transfers. It's transaction something happened At a manufacturer level wholesale level and retail level is basically when there's a purchase and a sale between two parties It's a transaction also the government can level can levies Transaction taxes and any government level can do you pay federal taxes? You might pay state and you might pay local based on transaction Usually these taxes are calculated as a percentage of the value of the of the transferred property So for example 6 percent 5 percent of the transaction So we're going to look at these type of transaction taxes One type of transaction taxes is excise tax and the federal government imposed this excise tax This tax is usually imposed on tobacco fuel gasoline and air travel Most of these taxes not all the aim of them the goal is to influence social and economic behavior for example Taxes and tobacco. They don't want you to smoke. It's not good for the healthcare system. Therefore they impose taxes Gas gas gas lure tax well encouraging you to buy a car that's fuel efficient And for manufacturers to produce fuel efficient car Now for example gasoline tax is also to encourage you to use public transportation But it's also to maintain the highways and air air travel for example for safety State and local excise often mirror federal federal ones So basically if the federal government imposes taxes on tobacco and fuel The state and the federal the state and the local government will go ahead and impose taxes as well So all state they have tax gasoline liquor and tobacco, but the rate between each state is different So in certain state they might they might Tax the tobacco at 50 percent or 40 percent at a high rate another state that might be 20 20 percent For example, they might add on every gasoline gallon of gasoline, you know 30 pennies or 20 pennies or whatever Now because of this i'll tell you a story Some people what they do they move they they go to one state Which is illegal buy tobacco from that state transported back and sell it in their state where the Where the taxes are higher for example, if you live in new york to give you an example and let's assume They the the excise tax on tobacco for the sake of simplicity 20 percent. I don't know how much it is I'm just making Making up numbers What what what some people will do they will go to another state Where the their the percentage on the tobacco is like 3 percent or 5 percent They will buy the tobacco there They go to the new they go to new york and they sell it for less than what other people are selling it because They were able to save some money. Well, that's illegal, but nevertheless I'm just telling you that's that just fyi from the real world Certain counties charge transaction tax on document recorded property transfers And most counties at least where I live in pennsylvania So if you buy a property and you want to transfer that property into your name The county will transfer the property will will register that in your name And what you do in the in where I live you pay 1 percent of the value of that property Other state and local excise taxes recently what was happening They are imposing a lot of taxes on hotel occupancy rental car Why an airbnb why well think about it why because these people that stays in hotels and their end car are not local people That what they called transient occupancy tax tot transient occupancy test Tax because what they do they go there they stay for a week for a few days Basically as a tourist or they're going by and they leave So if you pay tax if you impose taxes on them they cannot vote they cannot vote you out So they take advantage so when you go and you purchase a hotel be careful if they told you the room is 250 Well, I would say add 20 to 30 percent in taxes to that 250 because what what happened is the hotel is only required to quote Their price the room price But it's it gets quite expensive after you add all the state local taxes in the area occupancy test and especially a lot of taxes on airbnb These these taxes target as I mentioned non voting visitors transient people funding project like invention centers or sports arena For example, houston's hotel tax total 17 percent broken down by state city county and sports authority charges I'm telling you in some places. It's even higher than 20 percent. I know in canada, which is outside the u.s The additional taxes is approximately 25 to 30 percent of your bill of your hotel bill Let's move to general sales tax. That's also a transaction tax as the as the word suggests It's a sales tax when you buy something When you buy something from a store, for example, you buy something for a hundred dollar in pennsylvania Well, you have to add six percent to it And you have to pay 106 dollars 100 is the item price and you pay six dollars for the state now General sales tax differ from excise tax in scope because it applies to everyone. It applies to everyone that make a purchase While excise tax apply to specific transaction like 18.4 percent per gallon On the gasoline. So if you don't buy gasoline, you know, we don't have to worry about this tax General tax apply broadly general taxes apply broadly Such as five percent for example in pennsylvania at six percent and it differ from state to state Because there's no federal sales tax. The sales tax is a state level and there's in some cities There's a state tax and city tax. For example, new york and seradelfia However, this distinction can blur some state exempt some groceries Or drugs from sales tax because they think they are essentials And if you buy groceries to eat they should not charge you and this rate can vary with special rates like items like agricultural equipment prescription drugs or automobiles and within the The sales category they have different taxes in some state. For example, they might Tax more or less agricultural equipment prescription drugs the same thing Or automobile depending on what's what's the purpose? What do they want to do? They want to encourage you To spend money on this item or not Use tax is very similar to sales tax, but it's it's a compliment the sales tax And use tax became very prominent when I left practice. I left practice in 2010 I believe in 2010 what happened before 2010 2007 2008 2009 we were going through the great recession And states were desperate for money. So what they did they started to implement this use tax because what happened is this What's a use tax a use tax it applies to goods you purchase something outside your state But you live within the state prevent and Prevent a new from paying sales tax. I'll give you a case a case in point If you live in pa and next to pa the state of Delaware There's no sales tax There's no sales tax In the state of Delaware. There is a six percent state Sales tax in pennsylvania. So what some people do if they're living right on the border and I live right on the border I'm like 10 my 10 minutes away from the The state of Delaware what people would do they'll go the state of Delaware purchase something like an item a car For example, if you purchase a car if you're talking about a 30 000 dollar car And you have to pay six percent in pennsylvania. That's approximately 1 800 dollars not approximately 1 800 dollars Well, if you go to Delaware, you don't have to pay the the the sales tax If you live in pennsylvania, you have to pay the sales tax So what happened is some people will go to Delaware buy the car. So what state started to figure out that hold on a second We are losing a lot of money A lot of money with this use with people going outside the state and buying stuff. Well, what they did They imposed this Use tax where they send you a form with your taxes say well if you purchase something from outside the state report and pay the sales tax This this got very very bad where people new yorker people from new york They will order their it's they were especially from apple store They will order their computer from an apple to an apple store in Delaware And what they would do they will ship it to the to the apple store and they will drive It will be cheaper for them to drive from from new york to Delaware to pick it up Or they ask the Delaware office to mail it for them It would it would still be cheaper than paying the sales taxes in new york And also another example of this is new yorker. I remember 10 Longer than 10 years ago 20 years ago before the internet became prominent If you go to those shopping centers in pennsylvania those what they called They called them outlets outlet stores. You would see two three buses from new york You know bringing people to shop because new yorkers They would come to pennsylvania and pay less tax It will be worth it for them and they will spend the whole day in pennsylvania, which will be like a Something to do on sunday You would see those buses not anymore because people can buy online Now collection methods differ per state some let individual pay the Pay with their state income tax and in pennsylvania. They send you a form It's called the use tax and you'll have to fill it out Alaska Delaware and Montana as I told you Delaware I'm very familiar with because it's next to me Don't have any sales or use tax and there is no federal sales or use tax So if you if you live in Delaware, you don't pay any sales tax Because every time you go to the store there's no sales tax And there is no income tax for that matter, which is good to know no state income tax Severance tax are transaction taxes on extracted natural resources like oil or coal Rooted in the idea that the state had a stake in its resource And that's a major source of revenue in states like texas and hawaii where natural resource Is is abundant Taxes on transfers at that which is basically when the person Dies there's an estate and inheritance tax inheritance is doesn't apply to the federal level Related to property upon death Categorize also as a form of estate tax of x-i taxes estate taxes Now there's the estate tax estate tax is charged on the person that passed away on the decedence estate So when you pass away, well, what happened is they look at everything They look at the value of your property stocks bonds, whatever you have left and They they could charge a tax inheritance tax If one person passes away They pass the property to another individual the individual receiving the property on the federal level There is no inheritance tax. So inheritance tax applies to people who receive the money inheritance tax only Available on the state level and in some state estate tax tax and the Person that passed away the property of the person that passed away is a federal tax So the federal government don't have an inheritance tax So the federal government only enforces an estate tax Some state imposes inheritance estate or both states like florida and texas Don't have any of these taxes. Just if you want to die die in florida or texas Federal estate tax, let's talk about the federal. It was introduced in the Revenue Act of 1916 And the reason they did this is to what is to break wealth concentration because if you're Extremely rich, then you pass your All your wealth to your kids and grandkids then that wealth will be concentrated Well, what they did is they impose taxes. So if you're extremely rich and we're going to see what extremely rich This tax is not imposed until you are multimillionaire. This tax only applies to few people and its success is debated There's always the the discussion that you we should we should eliminate this federal estate tax Now estate taxes can be minimized minimized. It means reduced through tax planning. So rich people don't wait To die to pay taxes on their estate. They plan ahead They do some tax planning. They pay lawyers and accountants and CPAs to help them plan Property is valued. It's either at the date of that or six months after So, how do you know what's the property value of the decedent of the person that died? You'd look either at the fair value at the date of that or six months later and we'll have a whole chapter about this Now you can deduct funeral cost that charitable transfer and sometimes the marital deduction for the amount passed to a surviving spouse so if husband and wife The wife passed away Everything goes to the husband or vice versa Then there is no taxes because the transfer between the two is You know executed from taxes, but if they pass this property to their kids, then you have taxes After determining the taxable estate and adding gifts given during life because also the gift tax is included with the estate tax The tax is computed now. Don't worry. We're gonna talk about gift taxes and estate taxes later. This is just an overview But keep in mind there's a credit There's something called the unified transfer credit and this credit is in millions are subtracted So after you kind of figure out what's your estate minus all the cost minus charitable transfer Then the government gives you a large credit and whatever is left after the credit. It's the taxable amount again Only applies to people with multimillion State taxes on transfers and that some state taxes impose Inheritance and estate taxes. We already talked about these state taxes. What's the inheritance the inheritance when the money goes to you The person that's surviving State and her intense often characterize hairs based on the relation to the decedents Close relatives usually pay lower rate Or have a higher exemption Okay, many state exempt amount transfer to a surviving spouse from taxation Same thing as federal if this money going to the spouse husband or wife Then it's exempt just like the on the federal level Gift taxes what's gift taxes a gift is an excise tax on property transferred made during one lifetime So basically if estate taxes is when someone passed away They give you a i'm gonna quote a gift, but it's after they pass away This is what the estate taxes. So the person the donor the person that's giving you that gift Well, the estate the state will pay taxes on that Gift taxes is when someone gives you something when they're still alive Now again, the donor here is responsible for the taxes the doni if you receive the gift you're not responsible for the taxes This tax was introduced in 1932 the federal gift tax compliment the estate tax again They are connected together and you'll see how later Preventing tax evasion through a lifetime gift. So what they the gift tax is imposed for the reason of for example before you die You gift everything And that's it then the people that receive the gift don't pay any taxes So they want you to avoid from paying taxes Because when you die they look at all of your estate all of your asset and if you gift everything Then there's no tax therefore what they do they keep track of your gift Throughout your lifetime and they add it to your estate taxable gift are those exceeding the annual execution Minus the marital deduction you can again gift Husband and spouse they don't count the gift between them But what happened is you can gift for example a certain amount for the sake of illustration for the year 2023 You can gift any one seventeen thousand dollar without any Consequence to you or the donor or the doni So if I want to open the phone book and give everyone seventeen thousand dollar Well, guess what I don't have to worry about gift taxes I don't have to and the obviously the people receiving this money Don't receive any gift taxes. So in my class I always sell my students if I give each one of you Whatever that amount is that's going to change in 24 25 26 so on and so forth But there's always an annual exclusion. I can give you can give seventeen thousand for any individual Just you stop someone on the street here seventeen thousand dollar to you There's no tax effect to you the donor. There's no tax effect to the doni Let's assume you gave them For the sake of illustration you gave someone thirteen thousand dollar you stop someone at the street and say, okay Here's thirteen thousand dollar a gift from me to you. Well, here's what's going to happen Minus seventeen what's left is thirteen thousand now you keep track of this gift You say I gifted thirteen thousand Why do you keep track of it because you have to add all your gift the access of the exclusion Okay, and add them up when you pass away to determine whether you Exceed the limit or not don't worry about this. We'll talk about this later. I'm just giving you an idea Now you can give another individual thirty thousand as well. Then you subtract seventeen and what's left is thirteen So the first seventeen thousand to any individual is basically no tax consequences Now married couple can elect the split gift letting half from the donor And half, you know half from the donor spouse What's going to happen is and the other half from the other spouse Then you can double the gift the annual execution is doubled Let's take a look at this mcq multiple choice questions from farhat lectures All the following are taxes imposed by various government entities except So three are imposed And one is not a tax imposed The severance taxes is that imposed by By a government entity and the answer is yes. Remember some states Imposed the stacks severance tax. This is usually taxed natural resources oil cold So a is out b occupational fees. You remember we talked about occupational fees hotels local and state government they they love those taxes because Attacks transient Occupant so they don't care because these people are not staying there. They are leaving. They don't have they cannot vote them out Therefore it is a tax imposed the inherent in stacks. Well, is it the inherent in stacks? Well, the federal government don't impose inherent in stacks But the state government do so be careful A state tax you have the federal and maybe the state When it comes to the inherent in stacks, there is no federal inherent in stacks, but there is In some state state inheritance tax therefore see this is a tax is imposed D. Well by process of elimination D is the answer the export duties. Be careful Here they are confusing you. Do you know what export duties? Because tariffs is a form of income you could you know a form of tax It actually we did not even discuss tariffs But tariffs also is a form of transaction tax when you buy something from it's so small now that no one Worries about tariffs tax tariffs is when you buy something from another country and you try to bring it in They impose taxes on you. It's a transaction tax. The government imposed transaction on you. Well Export duties. It's when you export something when you sell something To to outs to to outside your country for example in the u.s If you sell something to canada to mexico to europe or to any other country Well, there's no taxes imposed on that the government loves it when you sell when you sell Your prop your your goods and services outside the country because you're bringing money to the country So this is not a tax imposed. So the answer is the Not because here have all are except That's not not the federal not the state not the local government impose this Export duties. What should you do now? You should go to far hat lectures. Look at additional mcqs true false questions That's gonna help you do what learn your income tax course better invest in yourself. Good luck study hard and of course stay safe