Introduction:

In this online exercise on tax vocabulary, we will both look at and explain the different types of taxes which are used in America (the United States) by the government to take money from its citizens or companies.

Please note, some of the names of the taxes here are different to what they are in Britain, Ireland and other English-speaking countries. Go to 'tax vocabulary: names & types of taxes' to do an exercise on the tax names in Britain and Ireland.

If you don't know a lot about taxes (or the English vocabulary of tax), I would recommended that you start by doing the online exercise 'essential tax vocabulary' before doing this exercise.


Exercise: Explaining US taxes

In the following conversation between two work colleagues (Peter and Jose), Peter is explaining to Jose the different types and names of taxes that people have to pay in America.

From the context, try to guess what the meaning of the words/phrases in bold are. Then do the quiz at the end to check if you are right.

Jose:'So the government takes tax from people's salary or wage, which is called income tax.'

Peter:'But it's not just your salary/wage that the government takes income tax from, it's from all of your income or earnings. So if you make money from stock/share dividends or renting a house or from the interest you receive from your savings in the bank, the government takes income tax from those as well.'

Jose:'Ok. I didn't know that. Are there any other taxes I have to pay from my salary?'

Peter:'Unfortunately, yes. Here in the US, the government also taxes your salary to pay for your pension and with another tax called social security tax. Also, there is another tax which is used to pay for the free medical treatment which people get when they are 65 or over called the Medicare tax or just Medicare. But unlike the social security tax, Medicare tax is taken from both a person's salary/wage and from the income they make from investments and savings (e.g. stock/share dividends, interest from savings etc...).'

Jose:'Like income tax?'

Peter:'Very similar.'

Jose:'So, apart from my salary and income being taxed, what other taxes do I have to pay?'

Peter:'You are also taxed when you buy things (like a computer, cookies, DVDs etc...) or use some types of services (like using a taxi or eating in a restaurant etc...). This tax is called the sales tax. The percentage you pay in sales tax depends on both the state (or even the city/county) you are buying it in and the type of product or service it is (some products/service have different sales tax rates and in some states there is no sales tax on certain products).'

Jose:'So many taxes. I have also heard about direct taxes. What are those?'

Peter:'Direct tax is not actually the name of a tax, but a type of tax. Direct taxes are all taxes which comes directly from your income, earnings or you have to pay for owning assets (like owning a house). So, income tax is a type of direct tax, because the government takes money directly from your salary and income.

Taxes which are added to the price of products or services are called indirect taxes because the tax isn't taken directly from you. With this type of tax, you only pay it when you buy or sell things. An example of an indirect tax is the sales tax.'

Jose:'So for a company, the tax it pays on its profit. Is that a direct or indirect tax?'

Peter:'The tax on a company's profits is called corporate tax. And because the government takes the tax directly from the company, it's a direct tax.'

Jose:'Are there any other taxes which companies have to pay?'

Peter:'Yes, there are. Some companies have to pay a tax for each product or quantity of products they produce to be sold or sell. This tax is called excise tax.'

Jose:'Why only some companies?'

Peter:'Because the government only places an excise tax on some types of products. Here in America, there is an excise tax on the sale of tobacco, alcohol and gasoline, but not on food, books or clothes.'

Jose:'But isn't that the same as sales tax?'

Peter:'It's in addition to sales tax, it's like an extra sales tax on certain products.'

Jose:'What other types of taxes are there?'

Peter:'There are lots, but one of the most important is capital gains tax. This is a tax on any profit a person or a company makes from actually selling something they own. For example, if you sell your business or stocks and shares, the tax on the profit you make is called capital gains tax.'

Jose:'I heard that if somebody gives you money or property after they die, the government even taxes that!'

Peter:'Yes, they do. It's called estate tax. So it's better to give your children money or property before you die.'

Jose:'Don't you also have to pay tax if you import something (like a car or furniture) from another country?'

Peter:'From some countries you do. Governments tax products that are imported from another country or sometimes even exported to another country. These taxes are called customs duties or tariffs.'

Jose:'Are there any more taxes?'

Peter:'Lots more. There is also in tax you pay to the council of the city or county for owning a property (e.g. a house, office, shop, factory, land etc...). It's called property tax and you have to pay it every year. The higher the value of the property, the higher the amount of property tax you will have to pay.'

Jose:'And if you rent the property, do you have to pay property tax?'

Peter:'No, you don't here in America.'


Now do the QUIZ below to make sure you understand the meaning of this vocabulary.


Quiz: Tax vocabulary - Names & types of US taxes

Below is a definition/description of each of the words/phrases in bold from the above text. Now fill in the blanks with one of these words/phrases in bold. Only use one word/phrase once and write it as it is in the text. Click on the "Check Answers" button at the bottom of the quiz to check your answers.

When the answer is correct, two icons will appear next to the question. The first is an Additional Information Icon "". Click on this for extra information on the word/phrase and for a translation. The second is a Pronunciation Icon "". Click on this to listen to the pronunciation of the word/phrase and to do a pronunciation speaking test.

1. Taxes which take money from a person's or company's income or earnings (like income tax), are a type of tax called    

         

Direct taxes:
(noun) All taxes are either 'direct taxes' or 'indirect taxes'. 'direct taxes' is the name for all the different taxes which take money directly from a person's or company's income, earnings or from the value of their assets (e.g. property or inheritance). Examples of 'direct taxes' are income tax, corporate tax, capital gains tax, social security tax.

'indirect taxes' are taxes on spending. They are taxes which are added to the price of a product or service. They are called 'indirect taxes' because the tax isn't taken directly from the person or company, but added to the price of the product or service. They are only paid when a product/service is bought or sold. Two examples of 'indirect taxes' are sales tax and excise tax/duty (which is paid when people buy certain products like tobacco, petrol, alcohol etc...).

In Spanish: "impuestos directos".

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Direct taxes:

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2. The tax people have to pay when they inherit money or things when somebody dies, is called    

         

Estate tax:
(noun) It is also called 'inheritance tax' in some states. This tax is taken by the federal (central) government and also by state and local (city or county) governments. This tax is taken when people inherit property, money or assets from another person when they die. The government/state calculates the total value of what somebody is going to inherit and then takes a percentage of it as 'estate tax' (they send them a tax bill/demand of what they have to pay).

In Britain, this is called 'inheritance tax'.

In Spanish: "impuesto sucesorio".

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Estate tax:

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3. The name of the tax that pays for medical treatment after somebody is 65, is    

         

Medicare tax:
(noun) This type of tax is taken by the federal (central) government out of most people's income (salary/wage, interest from bank savings, dividends from shares etc...). It is used to pay for the free medical treatment (called Medicare) that people receive when they are 65 or over.

In Spanish: "impuesto de medicare".

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Medicare tax:

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4. The tax which you pay for owning a house, apartment, office, is called    

         

Property tax:
(noun) This tax is taken by local (city or county) government from the owners of property (both residential and commercial/business). 'property tax' normally has to be paid by property owners every year. The amount of 'property tax' which is paid depends on what the market value of the property is seen to be. The higher the market value of the property, the higher is the 'property tax'.

In America, only the owners pay 'property tax', people or companies renting property don't pay it.

In Britain, 'property tax' for residential property is called 'council tax' and for business property 'business rates'.

In Spanish: "impuesto sobre la propiedad".

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Property tax:

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5. Taxes which are added to the price of a product or service (like sales tax), are a type of tax called    

         

Indirect taxes:
(noun) All taxes are either 'direct taxes' or 'indirect taxes'. 'indirect taxes' are taxes on spending. They are taxes which are added to the price of a product or service. They are called 'indirect taxes' because the tax isn't taken directly from a person or company, but added to the price of the product or service. They are only paid when a product/service is bought or sold. Two examples of 'indirect taxes' are sales tax and excise tax/duty (which is paid when people buy certain products like tobacco, petrol, alcohol etc...).

'direct taxes' is the name for all the different taxes which take money directly from a person's or company's income, earnings or from the value of their assets (e.g. property or inheritance). Examples of 'direct taxes' are income tax, corporate tax, capital gains tax, social security tax.

In Spanish: "impuestos indirectos".

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Indirect taxes:

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6. The name of the main tax taken out of a person's salary/wage which begins with 'I', is    

         

Income tax:
(noun) This tax is taken by the federal (central) government and also by many state governments. This tax is taken out of the income that people (not companies) earn (from their salary/wage, interest from bank savings, dividends from stocks/shares etc...). 'income tax' is not taken from any profit which people make from selling assets or property (e.g. a house, stocks etc...). There is a different tax for this, called 'capital gains tax'.

Another two taxes which are taken out of people's income are 'social security tax' and 'Medicare tax'. 'social security tax' is mainly used to pay for a person's pension, while 'Medicare tax' is used to pay for the free health treatment that people receive when they are over 65.

In Britain, it is also called 'income tax'.

In Spanish: "impuesto sobre la renta".

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Income tax:

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7. A tax like sales tax which companies have to pay when they sell certain types of products (e.g. tobacco or alcohol), is called a    

         

Excise tax:
(noun) Also called 'excise duty'. This is an 'indirect tax' which the federal and/or state government levy/make companies pay for selling certain types of products. Tobacco, alcohol, gasoline, airline tickets, trucks are examples of some products where 'excise tax' has to be paid. Companies add the amount of money they pay in 'excise tax' on to the price they sell these products for.

Companies only have to pay 'excise tax' when a product/service is sold. If the product/service isn't sold, they don't pay 'excise tax' on it.

For some products, the level of 'excise tax' can be quite high (depending on the state). For example, in some states the 'cigarette tax' (a type of 'excise tax') is over $3 for each packet sold.

But for other products, the 'excise tax' is often a lot lower. For example, an 'excise tax' of 12% has to be paid on the first sale of any truck.

On most products which have 'excise tax', people also have to pay 'sales tax' on them as well. The combination can often mean the majority of the price of a product is made up of tax.

In Britain, it is called 'excise duty'.

In Spanish: "impuesto sobre el consumo".

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Excise tax:

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8. The name of the tax which companies pay on the profit they make, is    

         

Corporate tax:
(noun) This tax is taken by the federal (central) government and also by state and local (city or county) governments from companies only. Companies have to pay this tax on all the profits they make (whether it is from selling their products or services, loans, renting property etc...). It is like an income tax for companies.

When a company makes a profit from selling assets they owned (e.g. property, stock/shares etc...), the government doesn't take 'corporate tax' from this. Instead, this profit from selling assets is taxed through 'capital gains tax'.

In Britain, this tax is called 'corporation tax'.

In Spanish: "impuesto corporativo".

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Corporate tax:

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9. The tax you pay when you buy products and services, is called    

         

Sales tax:
(noun) 'sales tax' is levied (added) when any goods or services are bought. It is taken by both state and local (city or county) governments. Both companies and people have to pay 'sales tax' when they pay for things. Normally, it is both the state and/or the city/county who decide what the percentage rate of 'sales tax' will be (in California the general state 'sales tax' is 7.5%, while in Alaska it is 0%) and on what types of products/services it is added to (in somes states/counties groceries have a 'sales tax', while in others they don't).

The rate of 'sales tax' not only depends on the state or city/county but also on the type of product/service. Somethings have a lower rate of 'sales tax' (e.g. electricity) than other things (e.g. TVs).

A similar tax in Britain is called 'value added tax (VAT)'.

In Spanish: "impuesto sobre la venta / IVA".

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Sales tax:

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10. Taxes that have to be paid when importing products, are called    

         

Customs duties:
(noun) Is also called a 'customs tariff' or 'import duty'. This tax is taken by the federal (central) government. This is a tax that is paid by the person or company importing products (and sometimes on exporting products as well).

The percentage rate of 'customs duty' depends on both the country where the product comes from and the type of product that is being imported. Products imported into America which have been produced in Canada or Mexico either don't pay 'customs duty' or pay a low rate.

In Spanish: "impuestos aduaneros".

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Customs duties:

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11. The tax that both people and companies have to pay on any profit they make from selling shares or property, is called    

         

Capital gains tax:
(noun) This type of tax is taken by the federal (central) government. When either people or companies sell assets (e.g. property, shares, equipment etc...) and make a profit from doing it, they have to pay 'capital gains tax' on the profit they make.

In Spanish: "impuesto sobre ganancias de capital".

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Capital gains tax:

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12. The tax used to pay for a person's pension, is called    

         

Social security tax:
(noun) This type of tax is taken by the federal (central) government out of most people's salary or wage (but not from money earned from other types of income, e.g. interest from bank savings, dividends from shares etc...). It is mainly used to pay for people's pension when they retire and for disability benefits.

The size of the pension that somebody receives from the government depends on the amount of money they have paid in 'social security tax'. The more tax you have paid, the higher your pension will be.

In Britain, this tax is called 'national insurance'.

In Spanish: "impuesto de la seguridad social".

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Social security tax:

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