Income Tax and Excise Taxes: A Brief Overview
As taxpayers, it is important to understand the different types of taxes that we may be subject to. Two common types of taxes are income tax and excise tax. Income tax is a tax on the income that individuals or businesses earn, while excise tax is a legislated tax on specific goods or services at the time they are purchased.
To calculate income tax, we focus on line one of the income tax formula, which is essentially an income statement. For businesses, the Schedule C for business income is used, which is also an income statement that includes income minus expenses or business deductions, with the net income flowing into line one of the income tax formula.
Excise taxes are specific taxes on particular goods or services, such as fuel, tobacco, and alcohol, and are applied at the time of purchase. Excise taxes can be used to disincentivize the purchase of these goods, as well as to tie their use to public goods that have been built with tax dollars.
Excise taxes can also be subject to a particular location and are typically collected from motor fuel sales, airline tickets, tobacco, and other goods and services. If you are subject to excise taxes, you will need to include them in your business model and file the appropriate forms. The federal excise tax is reported on Form 720, which consists of several broad categories of taxes, including environmental taxes on the sale or use of ozone-depleting chemicals and imported products containing or manufactured with these chemicals.
In conclusion, understanding the different types of taxes that we may be subject to can help us effectively manage our finances and plan for tax season. It is important to stay informed and consult with a tax professional for any specific questions or concerns.