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(Continued from previous article) So far, what has been discussed is how one is federally taxed as a regular individual; that is to say, we have learned what taxes are levied and withheld based on the normal individual person. That being said, it is only right that we move on to taxes that are rather specialized, taxes that are levied on corporations, the wealthy and certain products. So what are these subjects of federal taxation and how are they taxed, exactly? Well, perhaps it is best to start with something easy: let’s talk about excise taxes.

Excise taxes, also known as excise duty, is one of those indirect taxes that are levied on certain items – usually, said items are thought of as vice items (examples of which are tobacco and certain firearms) or fuels used by modes of transportation (particularly diesel gasoline). Essentially, what this “indirect tax” means is that individuals buying these items are immediately charged extra, thus paying a tax to the federal government by means of the simple act of buying. It is an “indirect tax” because it is not at all focused on a single individual – you are not targeted BY NAME when it comes to paying excise taxes. Excise taxes, of course, exist everywhere; however, the definition of “excise” could be different, depending on which country you live in. But, since we are talking about federal taxation in the United States of America, then we shall focus on the definition of “excise” in that particular context.

In terms of the American constitutional law, excise is (in essence) an event tax – the other type being a state of being tax. In other words, it is a tax based on events – things like sales, gifting of title transfers, and the receipt of wages are considered events – and is any tax that is not a “tax on property by reason of its ownership” or head taxes. Of course, this particular definition of the excise tax is strictly constitutional. In this sense, excise is rather different from duty, although both are considered event taxes.

In terms of American statutory law, however, the definition of excise is kind of “tweaked”. The statutory law definition of excise tax is a little more to the point: it is any tax CALLED or DENOMINATED as an excise tax. Federal statutory excises include things like vehicles that use up massive amounts of gasoline, luxury passenger vehicles, petroleum-based products, recreational equipment, communications services, vaccines, chemicals and firearms. There are a lot of of items taxed that are termed as excise, even though some of them are technically value-based property taxes. Then, there are excise taxes based on the selling or importing of certain goods, as well as fixed rate taxes on particular goods – these taxes are rather different from general sales taxes or value added taxes (to be discussed later). The taxes that are based on the selling and importing of goods are the ones that have the alternate name of “duty”.

The statutory law context of excise duty has the specific purpose of raising revenue for the federal government. But of course, there is also this other role of taxes that has been mentioned once before: certain taxes are there to influence certain behaviors of the people. Thus, it is not at all surprising that excise duties have the secondary purpose of discouraging certain activities from being the subject of engagement. Examples of these include the aforementioned vice taxes, taxes levied on items like tobacco products and alcohol – cigarettes in particular have a fixed rate for every pack sold. Another interesting thing about this particular type of excise tax is that it is sometimes to pay for certain related dues – a favorite example would be how the taxes levied on the sale of alcohol is being used for treating problems or diseases caused by alcohol.

Needless to say, there is a rather large difference between the definition of excise tax in terms of the American constitution and in terms of the American statutory law. While the former encompasses anything that is not a direct tax (that is, anything that is either directly paid to the government or a property tax), the latter only deems the items under “miscellaneous excise taxes” as excise.

Now let’s move on to another means by which we are taxed by the federal government – the transfer tax. The transfer tax is a tax paid by the extremely wealthy (individual or family-based). Essentially, the transfer tax happens when a title to a property is passed from one individual (or entity) to another. There are three major taxes that comprise the transfer tax: the estate tax, the gift tax, and the “GSTT” or the generation-skipping transfer tax. But before we discuss each and every one of those three particular transfer taxes, let’s talk a little bit more about the transfer tax in general.

Looking at it in a certain angle, the legal angle, the transfer tax could be seen as a fee that is paid for the act of transacting in terms of transferring the title. After all, there is often a legal need to formally register the transfer of title of things like real estate, bonds, or shares. In the US, the transfer tax is also predictably known colloquially as the estate tax or the gift tax (even though they are only KINDS of transfer tax), as much of the transfer taxes in America are apparently levied on transfers of property (particularly estates or properties like cars) from one person to another without carefully considering the consequences. Nevertheless, the transfer tax only makes up a small percentage of the yearly federal revenue.

Going to back to the details of transfer taxation: there are three kinds – the estate tax, the gift tax and the generation-skipping transfer tax or “GSTT”. These three kinds of transfer taxes have different features, and it is of the essence that we are aware of the stipulations of these taxes (even if we are not wealthy) in the off-chance that we come across them.

Let’s start with the estate tax, because this is a little complex, and the explanations may take a while. The American estate tax, as the name suggests, is a tax imposed on the estate. Of course, the tax here would only be on the taxable estate, and the estate in question belongs to a deceased person – thus earning estate tax the nickname “death tax”. Estate tax in the United States of America is therefore essentially an inheritance tax, a transfer tax that determines the fate of property transferred via a will or via intestacy (that is to say, whether or not the debts and costs of the deceased could be paid for by the value of the property provided that there is no valid will). There are many who are offended by the very idea of being taxed for their inheritance (thus originating the phrase “death tax” to politically inflame the issue), but at the moment this tax still holds. It is to be noted, however, that the estate tax is hardly ever levied on assets received by the spouse of the deceased or a charitable organization.

The estate tax comes in a federal context and a state-level context. Since we are talking about federal taxation in the US, then we are, for the moment, focusing on estate tax in the federal context. The federal estate tax is levied on the act of transferring taxable estate of the dead, provided that the deceased lived in or was a citizen of the United States of America. The total value of the estate is of course taken into consideration when computing for the estate tax, as are the various tax deductions that would determine the total of the taxable estate.

So what makes up the “gross estate” (that is to say, how do we arrive at the total undeducted value of a property)? In the context of the federal estate tax, the “gross estate” is the “value of all the property interests” of the deceased at the point of his or her passing. Apart from those interests, there are several other interests – most of which are NOT owned by the decedent when he died – that are included in the computation of the gross estate. The property interests that are included are as follows: the proceeds of some life insurance policies, the value of some “powers of appointment”, the value of property that is owned jointly, value of annuities, value of revocable transferred properties, the value of some properties in which the deceased expressed “reversionary interest”, the value of certain transferred property that the recipient is only free to enjoy AFTER the passing of the decedent, the value of some property declared as “life estate”, the value of particular items that had been transferred within the three years before the decedent passed away (except for gifts and properties that were sold for the full value), bank accounts and financial instruments that are “payable or transferable on death”, and the value of “dower or curtesy”. Of course, what is listed here is a bit incomplete, but those are the major additions.

Just a little side note about the addition of life insurance policy proceeds being added to the gross estate: this is only added if – and only if – the proceeds in question are either payable to the estate or if the deceased in some way has ownership and control over the insurance policy.

Now that we know what is being used to determine the value of the gross estate, let’s move on to what elements are deducted from the estate tax that the recipient of the property has to pay. That is to say, once you’ve figured out the value of your gross estate, you will subtract a particular value in order to arrive at something called the “taxable estate”, which is essentially the part of the value of the estate that will have an allowable tax percentage claimed by the federal government. Things like money spent for the funeral, donations to charities and items left to the surviving spouse or legal life partner are included in the list of deductions applicable (this is not a complete list, of course). The last one mentioned in the partial list is one of the most important provisions of this particular tax law: properties and trusts left to the person married to the deceased are exempt from federal taxation, unless the spouse that survived the dead is not a US citizen. In the case of the latter, unlimited deduction unfortunately does not apply, and they would thus have to acquire a Qualified Domestic Trust should they wish to utilize those deductions. (To be continued in next article)