The basics of tax: Frequently Asked Questions Volume I

In the nomad capitalist world, taxes are an important matter. In fact, they are to be taken seriously by everyone, but the implications of international structures take the situation to whole new levels of complexity.

What is the federal tax rate in my country? What is employment tax? What is taxable income and what are the deductions? With these Frequently Asked Questions, we want to go back to the basics of taxation. At the end of the day, you can’t design an elaborate plan without knowing your basics. 

Back to the basics: Frequently asked questions on taxes

What is federal income tax

You’ve probably heard these words many times. They describe those taxes that are due at a federal level, i.e., to the national government. On the other hand, there are state taxes, which are collected by the governments of the states or provinces. The federal tax rate refers specifically to the United States, but this system exists in other countries too, although with other names. 

In Argentina, for example, the Monotributo is due at a federal level, while Ingresos Brutos (gross income) is taxed by the provinces. What is the federal tax rate? That depends on the country. In the US, for instance, the rates range between 10% and 37%. 

What is income tax

Understanding what is income tax may help us organize our finances better. Most likely, you already know what this is, albeit intuitively, but categorizing the tax types is always helpful. 

Income tax fits into the category of the taxes you pay over the money you earn, in this case through a company or employment. Generally, personal income is the one you obtain through a job or independent professional activities while corporate income is the one you obtain from a corporate structure. However, there are grey areas like the LLC, whose earnings you can pass through and declare as personal income. If you are wondering “What is my income tax rate”? you should contact a tax expert specialized in your jurisdiction. 

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A quick Google search will throw us a list of the countries with the highest and lowest numbers when asking ourselves what is my income tax rate. Although this may not be based on hard facts or updated information, it surely helps to capture the gist of the matter.

Among the highest rates, we find names like Finland, Denmark, Japan, and Sweden. On the other hand, there are the countries with the lowest rates like Turkmenistan, Saudi Arabia, Guatemala, and Qatar.

It’s worth wondering about the connection between the taxes you pay and the quality of living you can inspire to. In this sense, compromises can be made, but this is beyond the scope of this article. 

One should be looking at places like Costa Rica, Paraguay, or Panama, which has a territorial tax system and a reasonable approach for those asking what is my income tax rate. 

What is taxable income

The total sum that must be considered as your tax base and over which the percentage will apply, is your taxable income. Every taxation system is different, and they contemplate exemptions and deductions. Some of your earnings may be deductible if you use them for tuition fees, student loan interests, alimony expenses, or donations. 

Exemptions are policies that directly exempt you from paying a certain tax. In some countries, the government rewards taxpayers who have paid on time throughout a certain period by sparing them a couple of months’ payment. 

For companies, exemptions can apply in the so-called free zones or special economic zones. These are special frameworks that aim to benefit certain areas of businesses to boost local economic activity. 

What is taxable income? All in all, this is what is left after deductions and exemptions are applied to the gross income. 

What is employment tax

In some cases, employers are responsible for retaining the income tax rate from the employee’s salary and remitting it to the tax-collecting entity. 

A different story is payroll tax, because this is paid by both parties. There are some mandatory taxes including social security and medical insurance and usually this liability is shared. In the US, employment tax is 15.3% and it’s split evenly between both parties (employee and employer will pay 7.65% each). In Panama, the employer contributions are 12.25% while the employee pays 9.75%.

Disclaimer: This article is based on general research; however, it doesn’t contemplate recent updates or the specifics that apply to each country and case. Doing taxes is a responsibility that must be taken seriously, this is why we recommend you contact a tax expert specialized in the country where you live or operate. 

Taxation as the basis of any financial plan according to Mundo

At Mundo, we believe in going where we are treated best. Taxation is ominous in some jurisdictions, but there are many others that offer friendlier conditions. 

As a publication for the nomad capitalist, Mundo is committed to the ideals of personal freedom. That’s why we connect you with key players in economic migration, banking, corporate, trust, real estate, and investments. 

It’s important to remember that whatever structure you build must be based on a smart tax approach and, most importantly, in full compliance with the laws and regulations.

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