Federal income tax is the basic tax that most people in the United States who earn an income have to pay. Income tax is the largest source of revenue for the federal government. The government uses tax revenues to fund national and local programs in education, transportation, defense and other service areas.
What taxes do we pay, besides federal income tax?

Here are the other sources of taxes you typically pay to the federal, state or local government:

State income tax

Most state governments assess income taxes on residents and workers in the state. The process for paying state income taxes is very similar to federal income tax, with withholding, estimated taxes and a requirement to file a tax return each year. Check your home state for specifics, unless you’re in one of the nine states that do not require income tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• North Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Sales and use tax

When you buy goods and services, there is often an extra charge on the purchase called sales tax. These taxes vary a lot by state and even by city or county — some don’t have sales tax at all. But most do, with rates ranging from 4% to 10% or more depending on the area and item purchased. The related use tax is one of the least-known taxes around, though most states have it. Think of it as sales tax that you voluntarily send in, for things purchased out of state (such as by mail order). Some states that have sales tax offer special tax holidays when you can shop and not pay tax — for example, during back-to-school time.

Property tax

Home owners in all states — except parts of Alaska — pay property taxes based on the value of their home and the land that it sits on. Tax schemes vary by region, but typically there is an assessed value for the property and a tax rate applied to that value. You pay these taxes directly to the local taxing authority, which is usually the county. In addition to homes and land, some states also tax other property such as cars or motorcycles.

Because property tax can be a large item in a homeowner's budget, it's important to understand how the tax works in the area you live. What is the tax rate, and can it change year to year? What is the assessed value of your home, and how often might your home's value be reassessed? How different is the assessed value from the current market value?

If the assessed value of your home is significantly higher than its current market value, you may be able to lower your property tax through some type of reassessment process. And if the assessed value is significantly lower than current market value, you may be at risk of a future increase in property tax. These are things to check in your area, because laws about this vary a great deal state to state. Your annual property tax statement will itemize the charges, and the website of the local taxing authority should describe how the tax works generally - and the circumstances where you can request a reassessment.

Capital gains tax

A capital gains tax is a tax on the increase in the value of an investment or property above the price you initially paid for it. In the United States, capital gains are only taxed when you actually sell the investment or property, except in very unusual cases.

Estate tax

Estate tax is a tax on property passed from deceased individuals to their heirs. It is assessed only on large estates. In 2012, "large" means more than $5,120,000, excluding anything left to a spouse or to charity. That is scheduled to drop to the old level of $1 million in 2013, unless Congress extends the current scheme or replaces it with something else.

Social Security and Medicare (FICA) tax

The federal government taxes your earned income to fund the federal government’s Social Security and Medicare programs. This is separate from income taxes, both in the rate you pay and where the money goes. The Social Security program provides retirement income, disability income and other financial benefits to those who qualify. For most individuals, Social Security is the single largest asset they’ll receive in retirement. It is a federal benefit that you will be able to collect when you retire.

Medicare is a federal program that pays for certain medical expenses when a person retires — typically if you are older than age 65. Medicare is not as comprehensive as private health insurance, but it is an important benefit available to most people when they retire.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a couple online features you might find useful:

• IRS Tax Topics Index: www.irs.gov/taxtopics

• Social Security Administration: www.ssa.gov

• Medicare: www.medicare.gov

• Tax Foundation: taxfoundation.org