Income tax is levied in almost all countries of the world. Comparing tax rates in different countries is a very interesting activity. In this article, we will take a closer look at the US tax system. It is very confusing even for Americans and requires detailed consideration. So, what is the United States state income tax? Now we find out.
Introduction
Income taxes in the United States are levied by federal authorities, most states, and many local governments. Income tax is determined by applying a tax rate, which may increase as income increases, to taxable income, which represents total income less allowable deductions. Individuals and legal entities are taxed directly, and property and trusts may be taxed on retained earnings. Partnerships are not taxed, but their partners are taxed on their share of the partnership's revenue. Residents and citizens are taxed on global income, while non-residents are taxed only on income within their jurisdiction. Several types of loans reduce tax, and some types of loans may exceed it. Alternative tax is applied at the federal level and in some states. The income rate is divided into the federal part and the state part.
Tax deductions
Most business expenses are deductible. Individuals can also deduct personal allowance and some personal expenses, including mortgage interest, state taxes, charity contributions, and some other items. Some deductions are subject to restrictions.
Capital gains are taxed, and capital losses reduce taxable income in the amount of profit (plus, in some cases, $ 3,000 or $ 1,500 of ordinary income). Individuals are currently paying a lower capital gains tax and certain corporate dividends.
Taxpayers, as a rule, must independently assess income tax by filing tax returns. Advance tax payments are required in the form of withholding tax or estimated tax payments. Taxes are determined separately by each tax jurisdiction. Deadlines and other administrative procedures are jurisdictional. April 15 after the tax year is the last day for individuals to file declarations for federal and many state and local declarations. The tax determined by the taxpayer may be adjusted by tax jurisdiction.
US Tax System Basics
In general, the question of how much interest income tax in the United States is incorrect. As in many developed countries, the US has adopted a progressive taxation scale. Income tax is levied on individuals, corporations, property and trusts. The definition of net taxable income for most sub-federal jurisdictions is mainly guided by the federal definition.
The tax rate at the federal level is differentiated, that is, tax rates for higher amounts of income are higher than for lower amounts. Some states and towns levy income tax at a differentiated rate, and some at a flat rate on all taxable income. The US income tax rate in 2013 ranged from 10% to 39.6%. But this is only a federal tax, there is also a state tax, which in each state has its own.
Individuals are entitled to lower federal income tax rates and capital gains and dividend taxes.The rate and some deductions are different for individuals depending on the filing status. Married persons can calculate tax both for a couple and separately. Single individuals may be eligible for preferential tax rates if they are the head of the household in which they live with a dependent. The subject of local income tax in the United States is income that is received even outside the state. That is, you can work in one state, and pay taxes in another.
Taxable income
Taxable income is defined in a comprehensive manner in the Tax Code and tax regulations issued by the Ministry of Finance and the tax service. Taxable income is adjusted gross income less certain amounts. Most states and towns adhere to these definitions, at least in part, although some of them make adjustments to determine the income tax in this jurisdiction. Taxable income for a company or business may not coincide with retained earnings.
What is gross income
Gross income includes all income derived from any source. This includes salaries, pensions, fees, money received for services, other income from business activities, income from the sale of other property, alimony received, proceeds from the sale of grain, and many other types of income. However, some incomes are exempt from income tax. This includes interest on municipal bonds. Adjustments (usually reductions) in the gross income of individuals are made to pay alimony, contributions to many types of pension funds or to health insurance funds, certain percentages of student loans, half self-employment tax, and several other items.
The cost of sales in business is a direct decrease in gross income. Commercial deductions may be as follows. The taxable income of all taxpayers is reduced by deducting expenses related to their business. These include salaries, rents and other business expenses paid or accrued, as well as depreciation charges. Deduction of expenses may result in losses. As a rule, such a loss can lead to a reduction in other taxable income, subject to some restrictions.
Personal deductions: individuals are allowed several non-commercial deductions. A fixed amount per person is allowed as a deduction for personal exemptions. For 2017, this amount is $ 4050. Taxpayers are allowed one such deduction for themselves and one for each person they support. Since 2018, a personal deduction is removed, but there is an increase in the standard deduction amount.
About the standard deduction
Standard deduction: in addition, individuals receive a deduction from taxable income for certain personal expenses, as an alternative, an individual can apply for a standard deduction. For 2017, the standard deduction is $ 6,350 for individuals, $ 12,700 for a married couple, and $ 9,350 for the head of the family. The standard deduction is valid for people over 65 and blind. For 2018, the standard deduction is $ 12,000 for single people, $ 24,000 for a married couple, and $ 18,000 for the head of household.
Capital gains
Qualified dividends may be taxed as part of taxable income. However, the tax is limited to a lower rate. Capital gains include income from the sale of shares and bonds, real estate and other assets. Profit is the excess of revenue over the adjusted base (net of depreciation) of property. This tax restriction also applies to dividends from US corporations and many foreign corporations. There are restrictions on the amount of net capital losses that may reduce other taxable income.
Tax incentives: all taxpayers receive a discount on foreign taxes and a percentage of certain types of business expenses. Individuals are also provided with loans related to educational expenses, pension savings, childcare expenses, some medical fees and credit for each child. Each loan is subject to certain rules and restrictions. Some loans are considered repayable.
Alternative minimum tax: all taxpayers are also subject to the alternative minimum tax if their income exceeds certain amounts of exclusion. This tax applies only if it exceeds the regular income tax and is reduced by some loans. So we sorted out what are the income taxes on individuals and legal entities in the United States. Below is an example of tax calculation.
Medicare surcharge
High-income workers may also pay an additional tax of 0.9% on wages, compensation, and self-employment income. However, these are optional payments. This tax is not included in the general income tax rate in the USA.
Tax returns
Most individuals must file tax returns for self-assessment of income tax each year when their income exceeds the standard deduction. Tax payment: taxpayers must pay income tax without waiting for an assessment. Many taxpayers are taxed at source on income. If income tax does not cover all taxes due, all taxpayers must make estimated tax payments.
Tax penalties
Failure to make payments or failure to submit returns may result in significant fines. Some deliberate failures can lead to imprisonment.
Tax returns may be reviewed and adjusted by tax authorities. Taxpayers have the right to appeal any change in taxes, and these rights vary depending on jurisdiction. Taxpayers can also go to court to challenge tax changes. The tax authorities are not entitled to make changes after a certain period (usually three years).
Tax calculation example. Profit tax for 2017
Take the following conditions: a taxpayer with a gross income of $ 40,000, without children, under the age of 65 and not blind, taking into account the standard deduction. The calculation of income tax in the USA is made for this taxpayer according to the following calculations:
$ 40,000 gross income - $ 6,350 standard deduction - $ 4,050 personal exemption = $ 29,600 taxable income = $ 9,325; taxation of the amount = $ 9.325 × 10% = $ 932.50. The amount of the so-called "secondary income" = $ 29,600 - $ 9,325 = $ 20,275.00; taxation of secondary income = $ 20,275.00 × 15% = $ 3,041.25. Total income tax $ 932.50 + $ 3,041.25 = $ 3,973.75 (~ 9.93% effective tax rate). Please note, however, that taxpayers with taxable income of less than $ 100,000 must use IRS tax tables.
In addition to income tax, an employee will also have to pay taxes under the Federal Insurance Contributions Act (FICA) (and an equal amount of FICA tax must be paid by the employer):
$ 40,000 (adjusted gross income); $ 40,000 × 6.2% = $ 2,480 (part of social security) $ 40,000 × 1.45% = $ 580 (part of Medicare) Total FICA tax paid by an employee = $ 3,060 (7.65% of income) Total individual federal tax = $ 3,973.75 + $ 3,060.00 = $ 7,033.75 (~ 17.58% of revenue). Total federal tax, including employer contribution:
Total FICA tax paid by employer = $ 3,060 (7.65% of income); The total amount of federal tax, including employer contributions = $ 3,973.75 + $ 3,060.00 + $ 3,060.00 = $ 10,093.75 (~ 25.23% of income). Effective tax rates are generally lower than marginal rates due to various deductions, and some people actually have a negative liability. Only the first $ 118,500 of anyone's income is taxed by social insurance (social security) in 2016.
Tax return and tax refund
Individuals (with income above the minimum level), corporations, partnerships, estates and trusts must file annual reports, called tax returns, with the federal and relevant state tax authorities. You can issue a refund of part of the taxes. These returns vary greatly in complexity depending on the type of file and the complexity of their affairs. In the declaration, the taxpayer reports on income and deductions, calculates the amount of tax arrears, reports on payments and loans, and also calculates the balance due.
Federal income tax declarations for individuals, property and trusts should be submitted by April 15 (in 2017, April 18) for most taxpayers. Corporate and partner federal income returns must be received two and a half months after the end of a corporation fiscal year. Tax returns from tax-exempt organizations must be submitted four and a half months after the end of the financial year. All federal tax returns may be extended. The terms and conditions of renewal for state and local tax returns vary.
Income tax returns usually consist of a basic form with attached forms and schedules. Depending on the complexity and nature of the taxpayer’s business, several forms are available for individuals and legal entities. Many people can use the one-page form 1040-EZ, which does not require any application other than salary statements from employers (form W-2).
Electronic filing of tax returns can be done for taxpayers by registered tax authorities.
If the taxpayer finds an error in the declaration or determines that the tax for the year should be different, he must file a revised declaration. These returns form claims for reimbursement if it is determined that taxes have been overpaid. Therefore, the final figure, how much income tax in the United States as a percentage of income, becomes clear to taxpayers only after the tax officers submit and analyze the declaration.
Conclusion
After reading this article, the reader can answer the question of what kind of income tax in the United States, and began to understand the US tax system. And it is quite complicated. Many Americans specifically hire tax consultants to help them figure out the tax system and file the right return. Income tax in the United States for non-residents is exactly the same as for residents, the only difference is that non-residents do not pay taxes on income received from abroad.
