My least favorite day of the year is April 15th, the typical due date to file income tax returns.
Every year, I plan and strategize to minimize my tax bill, hoping it will not be higher than my estimates.
After the tax returns are filed and the amount owed paid, I always feel a sense of relief. I can finally check off the task of paying taxes for one more year.
But this mindset is not really accurate, because I’m frequently paying some sort of tax. Taxes are so embedded in our daily lives that we’ve become accustomed to paying them without much consideration.
Here are just some of the taxes we pay and don’t often think about:
Payroll tax
Payroll tax includes the taxes employees and employers pay on wages, tips, and salaries. The first attempt at a payroll tax was passed in 1913, slowly evolving to what it is today.
For employees, taxes are held from their paychecks and paid to the government by the employer. These taxes include federal, state, and local income taxes. It also includes the employee’s share of Social Security and Medicare taxes (FICA), which are paid to the federal government. Taxes withheld from paychecks are:
—Social Security tax rate: 6.2% for the employee plus 6.2% for the employer
—Medicare tax rate: 1.45% for the employee plus 1.45% for the employer
—Additional Medicare: 0.9% for the employee when wages exceed $200,000 in a year
Sales tax
Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services.
California first adopted a general state sales tax in 1933, and since that time, the rate has risen to 7.25%. In addition to the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0.1 % and 1%. Currently, combined sales tax rates in California range from 7.25% to 10.25%, depending on the location of the sale.
In California, there is an exclusion from sales tax for most raw and basic grocery items meant for home consumption. However, the state does impose sales tax on snack foods like chips, candies, and cookies as well as prepared foods from restaurants and fast-food chains.
Gas tax
In 1919, Oregon became the first state in the nation to adopt a motor fuel tax. California implemented a 2 cents per gallon tax four years later in 1923, and by 1929, every state in the union had adopted the policy of charging an excise tax on gasoline. The revenue was a means to build out the new transportation infrastructure, which was lacking in the 1920s.
Today, California leads the nation with the highest gas tax. On July 1, the state increased the excise tax from 58 cents per gallon to 60 cents per gallon. That is only one of several taxes that Californian’s pay when they buy a gallon of gas.
According to the California Energy Commission, these taxes include:
— State underground storage tank fee: $0.02
—State and local sales tax (average rate of 2.25 %): $0.10
—Environmental programs (four-week average): $0.50
—Federal excise tax: $0.18
According to CalTrans, the excise tax pays for 80% of highway and road repairs. On average, Californians pay $300 a year in state gas taxes.
Under standards passed by the California Air Resources Board, at least 35% of model year 2026 passenger cars and trucks sold in the state will be electric vehicles, plug-in hybrids or hydrogen fuel cell vehicles. These numbers ramp up each year, and by 2035 will account for 100% of new vehicles sold.
California’s goal of increasing the number of electric cars, if successful, will decrease the demand for fossil fuel, reducing the gas tax revenue to the state. According to Calmatters.org, funding from gas taxes will drop by nearly $6 billion over the next decade.
Owners of electric cars do contribute to a road improvement fee when they register their car and when charging their vehicle. They pay a combined excise tax and surtax fee of $0.03 per kilowatt hour. This tax will offset some of the gas tax revenue, it’s anticipated the net result will be a $4.4 billion drop in funding, meaning there could be less money for highway programs and local road maintenance in the future.
Property tax
Property tax is an annual or semi-annual charge levied by a local government. It is paid for by the owners of real estate within its jurisdiction. The amount owed is a % age of the assessed value of the real estate.
Different types of properties have different tax rates, for example, cities, counties, and school districts all set tax rates. Currently, California’s base property tax rate is 0.78% compared to the nation’s highest rate in New Jersey at 2.3%.
If you don’t pay your property taxes on time, you risk being charged a penalty by your tax assessor, followed by a lien placed on your property for back taxes. A lien could eventually result in a foreclosure, meaning you could lose your home due to unpaid taxes.
If you itemize your deductions, property tax payments can be deducted from your tax returns. The sum of your paid property tax and state and local income taxes is deductible up to $10,000 per year.
Capital gains tax
Capital gains/losses are the profit or losses you incur from selling a stock, mutual fund, cryptocurrency, property, or ETF in a calendar year. For example, if you bought a stock for $100 and later sold it for $150, you would have a capital gain of $50. Capital gains are important to manage because the IRS considers this income, meaning you may be subject to tax.
Like income tax, the capital gains tax rate varies based on your overall income level. The amount you report on your tax return to calculate the tax is determined by two factors:
—How much you originally paid for an investment, plus adjustments (broker’s fees, commissions, return of capital, etc.)
—The date you purchased the investment
—This information is significant because it establishes the cost basis for the investment. Which becomes the benchmark used for determining the profit or loss realized from the sale of the investment.
Meanwhile, the length of time between when the investment was purchased and sold determines whether you will have short or long-term capital gains/losses. This information is tracked by the bank of brokerage company who[PC12] holds your taxable investments, then reported on a tax form at year-end.
The tax rates are different for both types of holding periods. Short-term capital gains are realized from the sale of investment property that has been held for one year or less and taxed as ordinary income. Long-term capital gains tax is owed on profits from investments held over one year, with the tax ranging from 0 to 20%. High income earners may also be subject to an additional 3.8% tax called the net investment income tax on both short-and-long term capital gains.
While there is no escaping taxes, we can thoughtfully manage how we spend our money to minimize taxes paid. Even if the tax savings are minimal, being aware of how taxes impact you will keep your finances top of mind, which is – key to financial success.
