Taxes are difficult to understand if you don’t have much financial knowledge. There are different types that you must be aware of, such as net worth taxes, estate taxes, income taxes, and much more.
Every tax also affects a family differently. If you want to learn more about it, you don’t have to look any further. Below we have detailed everything about wealth taxes.
Net Worth Taxes Vs. Income Taxes: What Are the Differences?
The main difference between net worth taxes and income taxes is that the latter is charged based on the money you earn every year. Meanwhile, net worth taxes consider all your liabilities and assets. This means it does not consider your wealth in a significant year only.
Another thing you must know is that income taxes are imposed on the flow of your wealth stock. It is charged every year and considers mainly your earnings instead of your total wealth.
The different assets that come under net worth taxes are stocks, bonds, ownerships, real estate, and bank accounts. This means it includes financial and non-financial assets. Meanwhile, liabilities include debts and mortgages.
Income taxes differ from net worth taxes because they are mainly based on financial wealth. The rates and application of both these taxes also vary, depending on your country’s rules.
Why Are Net Worth Taxes Controversial?
Net worth taxes are controversial because some people favor them while others do not. Here are the top reasons that will help you understand this better:
Some People Believe They Discourage Investment
Many people believe that net worth taxes discourage entrepreneurship and investments. This is because more wealthy individuals refuse to take risks and invest in new ventures. They accumulate their wealth mainly and avoid facing penalties by investing in ideas that may be risky.
However, other people believe that net worth taxes promote social equality along with economic equality. This is because wealthy people support public services more than regular individuals. They also generate better revenue for governments.
These differing views make this tax type more controversial than other taxes.
It Is Difficult To Determine The Correct Net Worth For Taxes
Another thing that makes net worth taxes controversial is that it is difficult to determine the overall wealth. Some people may also hide their funds in foreign bank accounts and real estate to pay lower taxes. This can create social inequality, and many people do not favor this tax due to it.
The value of non-financial assets is also difficult to determine due to market changes and other reasons. This is why you may suffer from unfair bills due to incorrect valuation.
A Constant Rate Can Impact People With Low Net Worth Negatively
People in different wealth categories also suffer from net worth taxes with flat rates. This is because every individual is charged the same rate, despite their wealth. It affects people with low net worth more significantly and prevents them from building their wealth.
For example, you may have a net worth of $10 million, while another individual may have a net worth of $10 billion. Due to the flat rate, you will be charged the same amount of tax. This can have a devastating effect on a person with a lower net worth because the rate will be significantly higher.
People consider flat ratings to be unfair and seek changes that will improve taxing methods. The different impacts on the economy and unfair bills make net worth taxes highly controversial.
How Do Net Worth Taxes Differ From Estate Taxes?
There are many differences between net worth and estate taxes. Here are some of them to help you understand easily:
They Are Timed Differently
The main difference between net worth and estate taxes is that they are charged differently. Net worth taxes are applied during the lifetime of a person. Meanwhile, estate taxes have to be paid only after the death of the individual.
This is why many people also refer to estate taxes as death taxes. You should also not confuse this tax with inheritance taxes. Both estate and inheritance taxes may apply after the death of a person, but they are applicable to different individuals.
Estate taxes are applied to the estate of the person who has passed away. Meanwhile, inheritance taxes are for those who are inheriting the estate. You should also note that net worth taxes don’t apply to the heirs. It is calculated using the overall wealth of the person regardless of its distribution after the individual’s death.
The Threshold Varies For Both Taxes
The threshold for estate and net worth taxes are also different. The former has a higher taxable threshold. This means that if a person is significantly wealthy, their estate tax will be lower than the net worth taxes.
Remember, the threshold will vary in different countries due to different rules and regulations. Net worth taxes are also charged mainly using a flat rate. However, estate taxes follow a progressive rate option.
They Have Different Exemption Rates
Another key difference between the two taxes is their exemption rates. Net worth and estate taxes are applicable for exemption if your wealth is under a specific amount. However, this is better for estate taxes because of exemption on net worth taxes considers only a small percentage, such as 1% percent on $1 million.
Meanwhile, you will be exempted from paying estate taxes if your estate values are under $11.7 million. This applies to federal estates in the US only. If you live in a different country, you must learn its federal rules of exemption for estate and net worth taxes.
This is all you need to know about wealth taxes. They have been created to avoid social and economic differences. However, some taxes are controversial due to unfair billing and high flat rates.
If you have a low net worth, but it is above the exemption rate, you may suffer more from a high tax rate than individuals who have a higher net worth.
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Josh is an entrepreneur and financial expert with over a decade on Wall Street as an economic strategist. His career started in finance, progressed to owning multiple business, and now shares his insights and life hacks with readers of DailyWisely.com.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently shares his financial expertise in investing, wealth management, capital markets, taxes, real estate, and personal finance on his personal finance site, Top Dollar Investor.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business.
Josh is the owner of Top Dollar and Daily Wisely, the former focusing on personal finance and wealth building strategies, while this site focuses on living well and enriching content that Josh curates with his team.