Direct taxes are a form of taxation that are paid by the person or business on which they are levied. This means that direct taxes cannot be shared or passed on to other parties. Unlike indirect taxes, such as gas taxes, direct taxes cannot be hidden within the costs of goods and services.
Federal, state and local governments levy income taxes on personal wages and business profits. The IRS states that the U.S. uses a progressive income tax system which levies higher tax rates on larger incomes. The U.S. tax code also provides various credits and deductions to lower tax liabilities. Individuals usually have income taxes deducted from their pay checks on a "pay-as-you-earn" basis while companies pay income taxes on a quarterly basis. Since these payments are estimates, additional tax payments may be due at the end of the year. In the case of an overpayment, tax payers may be entitled to a refund.
According to Investopedia, transfer taxes are imposed by federal, state and local governments when ownership of property--including real estate and wealth--is passed from one person to another without monetary compensation. In the U.S., the most widely known examples of transfer taxes are gift and estate taxes. Gift taxes are collected from individuals who transfer money or other property to another person. Estate taxes are collected from the taxable portion of a deceased person's estate which may include financial accounts, trusts and life insurance benefits.
According to the IRS, the federal government collects entitlement taxes to pay for social programs such as Medicare, Medicaid, Social Security, and other social--also called "entitlement"--programs. Individuals pay entitlement taxes through payroll deductions which are often grouped together as Federal Insurance Contributions Act--or FICA-- payments. FICA taxes are not imposed on unearned income such as interest, dividends, investments and capital gains. Self-employed people and companies include entitlement taxes in their quarterly tax payments.
Investopedia states that state and local governments collect property taxes on buildings and land to pay for local public services such as police and fire departments, schools, roads and libraries. Property taxes are based on the value of the land and any buildings or other man-made structures, called improvements. The value is assessed annually to account for fluctuations in local real estate prices. Property taxes may increase or decrease depending on the local budget needs.
Capital Gains Taxes
Capital gains taxes are charged when selling assets such as real estate, stocks, art work or a business, according to the Library of Economics and Liberty. The amount of tax depends on the difference between how much an asset was worth when it was first acquired and what it is worth at the time of sale. Since inflation can affect capital gains, the tax rate is lower for these types of transactions. People can deduct a portion of the capital loss if the asset is sold for less than it was bought for.