Discharging Taxes in Bankruptcy: What is a "Tax?"

Know what kind of taxes you owe before you file a bankruptcy case. Getty Images

Discharging Taxes in Bankruptcy: What is a “Tax?”

In this series of articles, we’re looking at whether taxes can be discharged in a bankruptcy case. We know that some taxes can be discharged - that is, the taxpayer or debtor will be relieved of the liability for paying the tax. To determine which taxes will be discharged, we must look at a number of factors, including when the return was filed, whether the tax was assessed after the return was filed, etc.

In this article, we look at the fundamental question of what we mean when we use the word “tax.” 

When anyone brings up taxes, especially the first of the year, many people think of April 15 and the income tax that’s taken out of our paychecks or that we are supposed to set aside if we are self employed. Others likely think of the tax on property that is used to support local services, including hospital districts and utility districts. Here is a brief explanation of the types of tax you may encounter in your personal and your business lives.  

Income Tax: Of course, residents of the United States pay a tax on their income to the federal government. In addition to federal income taxes, many states and some municipalities require that their residents pay a tax on income.

Payroll Taxes: In addition to state and federal income taxes, payroll taxes are those amounts that individual taxpayers fork over for Social Security old age benefits and disability benefits, Medicare (also called FICA) and Federal (FUTA) and state unemployment taxes.

 

Trust Fund Taxes: The amounts withheld by an employer from an employee’s paycheck and held for the benefit of the government before they are remitted to the government. They are called “trust fund” taxes because they are held by the employer for the government in trust or for safekeeping. Here is an example: Mary employs Teddy.

Every week, Mary pulls out $100 from Teddy’s pay to cover his income taxes, Social Security and Medicare. Periodically, Mary sends that money to the IRS. While those funds are in her possession, she is holding them in trust for the benefit of the government.

Property Tax: Property taxes can be levied on real estate, including land and improvements like a house or farm buildings. Property taxes are also often levied against personal property like cars, inventory, even furniture and appliances.

Sales Tax: Sales tax is that amount added to the sale of goods and some services that benefits a state or local taxing authority.

Excise Tax: Excise taxes are charged on specific items or services and are usually included in the price. For instance, many of the taxes on a gallon of gasoline or a six pack of beer are excise taxes imposed by the federal government.

Estate Tax: Estate Tax is levied against the estate of a deceased person before the property is distributed to the heirs. The estate includes all of the property and property rights someone owned when she was alive.

Capital Gains Tax: A capital gains tax is paid on profits made on the sale of property. If you bought a painting at $100 and sold it ten years later for $300, your capital gain on that sale is $200, and you would have pay taxes on the $200.

Value Added Tax: This is a tax added to the cost of a product at various steps in the manufacturing process designed to reflect the value added by the step. Value added taxes are more popular in Europe and other parts of the world than in the United States.