The American tax system can seem like a maze. From money deducted from your paycheck to extra costs tacked onto your store purchases, it's a tangle of federal, state, and local taxes. These taxes fund everything from government operations to the school down the street. Our team at Pasquesi Sheppard in Lake Forest, Illinois, has prepared this guide to different types of taxation to cut through the confusion and explain the main taxes affecting you and what they mean for your bottom line.
How the U.S. Tax System Works: Federal vs. State vs. Local
The U.S. tax system has three layers. Federal taxes fund Social Security, Medicare, government spending, and various agencies. State taxes support colleges, highways, and other programs. Local taxes pay for schools, police, firefighters, and road repairs.
You're often paying multiple government bodies at once. Americans will spend nearly 7.1 billion hours on tax paperwork in 2025, equal to 3.4 million full-time workers. Total compliance costs hit $536 billion, with taxpayers paying $148 billion in out-of-pocket expenses.
More than 50% think they pay more than their fair share, 85% feel frustrated by federal tax complexity, and 66% don't trust how the government spends tax money. The IRS recently targeted 125,000 wealthy individuals who haven't filed since 2017 despite making over $400,000. The U.S. Treasury recovered $172 million from 21,000 taxpayers, as noted in our newsletter.
Types of Taxes on Income
Income taxes use a pay-more-if-you-earn-more system. In 2025, single filers pay:
- 10% on income up to $11,925
- 12% on income from $11,926 to $48,475
- 22% from $48,476 to $103,350
- 24% from $103,351 to $197,300
- 32% from $197,301 to $250,525
- 35% from $250,526 to $626,350
- 37% above $626,350
Married couples have higher thresholds. The standard deduction is $15,750 for single filers or married couples filing separately, $23,625 for head of household, and $31,500 for married couples filing jointly or a qualified surviving spouse.
Eight states have no individual income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Wyoming
Sixteen states use flat rates, from Arizona's 2.5% to Idaho's 5.695%. All employees pay Federal Insurance Contributions Act, or FICA, taxes: 6.2% for Social Security on the first $176,100 in wages and 1.45% for Medicare on all wages. High earners pay an extra 0.9% in Medicare tax on income over $200,000 (single filers), $250,000 (married joint filers), or $125,000 (married separate filers).
Self-employed individuals pay 15.3% in self-employment tax (12.4% for Social Security plus 2.9% for Medicare) on net earnings of $400 or more. Only 92.35% of self-employment earnings get taxed this way. Unlike employees, self-employed people must pay quarterly estimated taxes or face penalties.
Taxes on Purchases: What You Pay When You Buy
Sales taxes vary significantly by location. The national average rate hit 7.52% in 2025, up from 7.49% in early 2023. Louisiana tops the list at 10.11%, followed by Tennessee (9.61%), Arkansas (9.48%), Washington (9.47%), and Alabama (9.44%). Alaska charges just 1.82%, with Hawaii (4.50%), Maine (5.50%), Wyoming (5.56%), and Wisconsin (5.72%) at the bottom.
Forty-five states have statewide sales taxes, and 38 states add local taxes on top of that. Your rate depends on your specific town or county. Most states require online retailers to collect taxes once they sell $100,000 worth of goods in that state. Large marketplaces, such as Amazon, eBay, and Etsy, handle tax collection for sellers.
Excise taxes target specific items, such as gas, alcohol, and cigarettes, to raise money and discourage use. Sales taxes affect lower-income families more since they spend a larger portion of their income on taxable goods, making it a regressive tax taking bigger bites from smaller paychecks.
Taxes on Property and Wealth: What You Pay for What You Own
Property taxes fuel local governments, making up 27.4% of all state and local tax collections in fiscal year 2022 and 70.2% of local tax money. These taxes are calculated by multiplying your property's assessed value by the local millage rate, which varies based on location and services provided. Your property tax dollars pay for schools, police, firefighters, libraries, parks, and local roads.
Tax rates and assessment methods differ across America, creating huge gaps in tax bills even for similarly valued homes. Local governments set both assessment methods and tax rates, creating a patchwork system. Some places also levy taxes on personal property, such as cars, boats, and other valuables. Veterans and certain groups can reduce their taxes through property tax exemptions.
Taxes on Investments: What You Pay on Financial Gains
Investment taxes depend on holding period and income type. Short-term gains (held a year or less) are taxed like regular income at 10% to 37%, while long-term gains get special treatment. In 2025, long-term capital gains rates are zero for single filers up to $48,350 ($96,700 for married filing jointly), 15% for singles earning $48,351 to $533,400 ($96,701 to $600,050 for married filing jointly), and 20% for singles making more than $533,401 (over $600,050 for married filing jointly).
Qualified dividends are taxed at long-term capital gains rates, while nonqualified dividends face ordinary income rates. Interest from bonds, savings accounts, and certificates of deposit count as regular income. High earners pay an extra 3.8% net investment income tax when their modified adjusted gross income tops $200,000 for single filers or $250,000 for married filing jointly.
Retirement accounts cut current taxes or grow money tax-free. Contribution limits for 2025 are $23,500 for 401(k), 403(b), 457(b), or Thrift Savings Plans, plus catch-up contributions if you're over 50. Traditional and Roth individual retirement accounts allow $7,000 in yearly contributions plus an extra $1,000 for those over 50.
Specialty Taxes You May Encounter
Unemployment taxes mainly affect employers. Employers pay federal unemployment tax at 6% on the first $7,000 of each worker's wages, but they can get up to a 5.4% credit for paying state unemployment taxes on time, dropping the real rate to 0.6%.
Other specialty taxes target specific transactions. Import duties on foreign goods end up in consumer prices. The Alternative Minimum Tax works as a backup calculation to prevent wealthy people from avoiding taxes. Luxury taxes increase the price of high-end cars and boats, while sin taxes on tobacco and alcohol discourage use while filling government coffers.
The tax maze has driven more and more people to seek professional help. Tax advocates have seen cases jump 18% during fiscal year 2024.
Navigate Your Tax Obligations With Professional Guidance
Many different types of taxes make our tax system complicated. Tax professionals can help when you have a high income, multiple income sources, own a business, have major investments, or face big life changes. Smart tax planning throughout the year can legally cut your tax bill. With such a confusing system and the real financial impact of mistakes, working with tax experts gives you peace of mind and often saves you money. If you're ready to get a handle on your taxes, reach out to our friendly, knowledgeable team at Pasquesi Sheppard for guidance tailored to your specific situation.
person holding pencil near laptop computer by Scott Graham is licensed with Unsplash License