Taxes Tax Planning What Is a Direct Tax? Direct Taxes Explained in Less Than 4 Minutes By Sakshi Udavant Sakshi Udavant Twitter Website Sakshi Udavant covers small business finance, entrepreneurship, and startup topics for The Balance. For over a decade, she has been a freelance journalist and marketing writer specializing in covering business, finance, technology. Her work has also been featured in publications and media outlets including Business Insider, Chicago Tribune, The Independent, and Digital Privacy News. learn about our editorial policies Updated on January 10, 2023 Reviewed by David Kindness In This Article View All In This Article How a Direct Tax Works Example of a Direct Tax Types of Direct Taxes Frequently Asked Questions (FAQs) Photo: Lilly Bloom / Getty Images Definition Direct taxes are those paid by taxpayers directly to the government, such as income tax, property tax, and other taxes levied on assets owned by an individual or entity. Key Takeaways Direct tax is a broad category that includes property tax, income tax, capital gains tax, and other taxes paid directly to the government.Direct taxes can't be transferred to another individual or entity. They must be paid by the person or organization who incurred them.Federal, state, and municipal tax guidelines vary and can significantly affect the amount of tax you have to pay. How a Direct Tax Works A tax you pay directly to the government is known as a direct tax. The federal, state, or local government imposes a tax on a person or entity, who then pays the tax directly to the government. The federal income tax is a common direct tax. The amount of income tax you pay depends on how much you earn, whether you're single or married, whether you have children or other dependents, and other factors. In general, the federal income tax brackets levy larger percentages of income tax on higher incomes and smaller percentages on lower incomes. This progressive tax system means that people who earn more money pay more income tax directly to the government. Note Direct taxes must be paid by the person or entity that incurred them, unlike indirect taxes, which can be passed on to others. The excise tax on gasoline is a common type of indirect tax. The federal government charges an excise tax of 18.4 cents per gallon on gas, which is paid by the manufacturer but generally passed on to the retailer and then to the consumer. Taxes are a much-debated component of the economy. Still, generally speaking, they exist to fund various government programs and services such as Social Security, Medicaid, and other citizen well-being initiatives. They also help fund civic repairs, public transportation, and other beneficial services. Example of a Direct Tax If you own a home, your local government may charge a tax on your property—called a property tax. Let's say that you own a home that's valued at $300,000, and your town charges a $20 tax on every $1,000 of your home's tax-assessed value. As a result, you would owe a direct tax of $6,000 per year to your local government ($300,000 / $1,000 = 300 * $20). The direct tax of $6,000 might be split up into monthly or quarterly payments. Note As taxpayers' incomes increase, so does the percentage they pay in taxes, but only on the amount of the increase. Types of Direct Taxes Direct tax is a broad term that includes several types of taxes paid directly to the government, including: Income tax: You'll pay a percentage of your earnings to the government as income tax. Everyone is subject to federal income taxes, and most states charge income tax as well. For example, in 2022, California charges up to 13.3%, while Texas and Washington don't charge any income tax. Depending on where you live, you may also pay municipal income taxes. Capital gains tax: This is a form of income tax measured by how much value your assets have gained from the point of acquisition (when you bought them) to the point of sale. You'll pay capital gains tax along with other taxes when you file your tax return. Property tax: Property tax is paid on each piece of property a taxpayer owns, including land, houses, and any other buildings. Property taxes are calculated based on the geographical location of the property, the market value of the land, and an estimate of the home's value. Personal property tax: Some states, including Connecticut, Mississippi, and Virginia, also charge personal property taxes on movable items such as cars, boats, and RVs. If you live in one of these states, you may pay an additional direct tax based on the value of these items. Frequently Asked Questions (FAQs) If I accept a job that pays $5 million per year, will I have to give up over a third to taxes? No, not exactly. Even though your income puts you in the highest tax bracket, you won't pay the marginal tax rate on all of your earnings. You will be taxed the same way as everyone else in the given bracket. In 2022, you'll pay only 10% on the first $10,275, then 12% on the next portion, and so on, working your way up the marginal brackets. You'll only pay the maximum 37% on the portion of your income that exceeds $539,990. What do my income taxes pay for? When you pay income or other direct taxes, the money goes straight to the state or federal government to fund various programs and initiatives. Social services, infrastructure, national defense, and government debt are some of the things that citizen taxpayers help pay for each year. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. U.S. Energy Information Administration. "Frequently Asked Questions (FAQs): How Much Tax Do We Pay on a Gallon of Gasoline and on a Gallon of Diesel Fuel?" Tax Foundation. "State Individual Income Tax Rates and Brackets for 2022." IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."