Taxation in US
Taxation in US – an Introduction
Taxation in US is a bit complex matter that may consist of a number of methods and involvement of at least four different levels of payment. As the federal government imposes you a progressive tax on the taxable income, you may also need to pay taxes to a few other bodies like one or more of municipal, township, district and county governments. You need to pay taxes for different types of income including wages and salaries, bonuses, commissions, dividends, interest, pensions, royalties, interest, rent, and capital gains. Based on your income, your tax amount is calculated and you file your tax return.
Basics of Income Tax in US
The income tax and its calculation are a bit complex process in United States. In order to learn the process better, you need to understand a few terms quite clearly. The income tax is calculated on your gross incomes. Gross income is your income from all the sources less any exclusion. Exclusions are something that you need not include in your income for taxation, like employer-paid health insurance, interest from tax-exempt bonds etc.
Before you calculate your taxable income, you need to know one more term, called Adjusted Gross Income (AGI). AGI is the gross income less any above-the-line deduction like trade or business deductions, moving expenses, alimony etc. You can learn more about above-the-line deductions from § 62. Your Taxable Income is calculated after deducting itemized deductions or applicable standard deduction, whichever is greater from AGI. Deductions for any allowable personal exemptions for the taxpayer, his/her spouse and dependents are also subtracted from the AGI.
So, Taxable Income = AGI – (itemized deductions or applicable standard deduction, whichever is higher) – (deductions for any allowable personal exemptions for the taxpayer, his/her spouse and dependents).
Standard deduction is for the non-itemizers. Any deductions (like charitable contributions, certain medical expenses) that are not listed in § 62 fall under itemized deduction. The Tax Due amount is calculated by multiplying Taxable Income by the appropriate tax rate.
Tax Credits like Earned Income Tax Credit, Child Tax Credit etc. play an important role in taxation as these reduces your tax on a dollar-for-dollar basis. Note here that, deductions are applied before the tax rate, but the tax credits are applied after. This is the reason why tax credits are more valuable than the deductions.
For filing annual tax return, you need to fill up the tax return form 1040. There are some different versions of this form. Who have taxable income under US$100,000, should use versions 1040EZ and 1040A.
Income Tax Rates
There are several Income Tax Rates for the taxpayers in United States. Different rates are applicable for different individuals like Single individuals, Married individuals, separately filing Married individuals, and Head of household.
Single individuals:
| Taxable Income $0 to $8,025 | 10% of amount over $0 |
| Taxable Income $8,025 to $32,550 | $802.50 plus 15% of amount over $8,025 |
| Taxable Income $32,550 to $78,850 | $4,481.25 plus 25% of amount over $32,550 |
| Taxable Income $78,850 to $164,550 | $16,056.25 plus 28% of amount over $78,850 |
| Taxable Income $164,550 to $357,700 | $40,052.25 plus 33% of amount over $164,550 |
| Taxable Income $357,700 and above | $103,791.75 plus 35% of amount over $357,700 |
Married individuals:
| Taxable Income $0 to $16,050 | 10% of amount over $0 |
| Taxable Income $16,050 to $65,100 | $1,605.00 plus 15% of amount over $16,050 |
| Taxable Income $65,100 to $131,450 | $8,962.50 plus 25% of amount over $65,100 |
| Taxable Income $131,450 to $200,300 | $25,550.00 plus 28% of amount over $131,450 |
| Taxable Income $200,300 to $357,700 | $44,828.00 plus 33% of amount over $200,300 |
| Taxable Income $357,700 and above | $96,770.00 plus 35% of amount over $357,700 |
Separately filing Married individuals:
| Taxable Income $0 to $8,025 | 10% of amount over $0 |
| Taxable Income $8,025 to $32,550 | $802.50 plus 15% of amount over $8,025 |
| Taxable Income $32,550 to $65,725 | $4,481.25 plus 25% of amount over $32,550 |
| Taxable Income $65,725 to $100,150 | $12,775.00 plus 28% of amount over $65,725 |
| Taxable Income $100,150 to $178,850 | $22,414.00 plus 33% of amount over $100,150 |
| Taxable Income $178,850 and above | $48,385 plus 35% of amount over $178,850 |
Head of household:
| Taxable Income $0 to $11,450 | 10% of amount over $0 |
| Taxable Income $11,450 to $43,650 | $1,145.00 plus 15% of amount over $11,450 |
| Taxable Income $43,650 to $112,650 | $5,975.00 plus 25% of amount over $43,650 |
| Taxable Income $112,650 to $182,400 | $23,225.00 plus 28% of amount over $112,650 |
| Taxable Income $182,400 to $357,700 | $42,755 plus 33% of amount over $182,400 |
| Taxable Income $357,700 and above | $100,604.00 plus 35% of amount over $357,700 |
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