What is US income tax? US income tax review

Income tax is the most important type of federal tax in the United States, along with payroll tax, estate and gift tax, and several excise taxes. In fiscal year 2019, the federal government's revenue is estimated to be about $1.7 trillion from personal income taxes, accounting for 49% of the total federal government revenue. Corporate income taxes will be about $216 billion, accounting for 6%, while payroll taxes are estimated to generate $1.2 trillion, accounting for 36% of revenue. The rest of the federal government's revenue comes from excise taxes (3%) and other sources (5%).

Individuals and corporations pay income taxes directly. Estates and trusts may be taxed on undistributed income. Partnerships are not taxed, but their partners are taxed on their share of the partnership's earnings. All U.S. residents and citizens are taxed on their worldwide income, not just income in the U.S. (or its jurisdiction) (although they can use the foreign earned income exemption to offset taxable income). In addition, "payroll taxes" are FICA taxes, which are used to fund Social Security and Medicare. Income taxes, unlike payroll taxes, go to state and federal coffers.

To calculate income tax, you need to calculate the taxable income (i.e. total income minus deductions, etc.) according to the tax rate bracket. The concept of income covers a wide range, including wages, tips, capital gains and other income. Some tax credits can directly reduce taxes. Some tax credits may exceed the taxable amount, so you don't have to pay taxes, or you can get a tax refund.

The United States adopts a tax reporting system, where individual taxpayers are required to calculate and report their own tax payable, but the tax authorities may adjust the tax payable based on the facts they have.

Overview

The U.S. federal government, most states, and some local governments impose taxes on net taxable income. Income tax is levied on individuals, corporations, estates, and trusts. State and local governments mostly follow the federal definition of net taxable income.

Federal income tax is levied under the Internal Revenue Code. Federal income tax rates are progressive, depending on income level. As income increases, additional income will be taxed at a higher rate. After the 2018 tax reform, the federal income tax rate ranges from 10% to 37%. Some state and local income taxes have progressive tax rates, but others impose a single tax rate on all taxable income.

Taxpayers' tax rates and some deductions are adjusted based on their filing status. Individuals' tax status includes: (1) single, (2) married filing jointly, (3) married filing separately, and (4) head of household (i.e., some singles living with dependents and meeting other conditions). Individuals pay a lower federal income tax rate on capital gains and qualifying dividends than on other income.

Personal income tax

Individual income tax payers are U.S. citizens, resident aliens, and non-resident aliens. U.S. citizens refer to people born in the U.S. and naturalized U.S. citizens. Resident aliens refer to people who are not U.S. citizens but have legally recognized permanent residency under U.S. immigration law. Other foreigners are non-resident aliens. U.S. citizens and resident aliens are subject to tax on their worldwide income, while non-resident aliens only pay federal individual income tax on their investment income from the U.S. and certain income actually related to business operations in the U.S.

Individual income tax is levied on comprehensive income. The taxable items include: income from labor and wages, dividend income, property rental income, business income, capital gains, and retirement annuity income. Non-taxable items that should be excluded from income include: donations, child support paid by one spouse to the other spouse in a divorce, income from long-term residence abroad, military and veterans' allowances and annuities, social insurance and similar allowances, small employee income benefits, state and local prize bond interest, life insurance income, and dividends within a small limit. Deductible items include: taxes paid abroad, in the state, and in the local area, medical expenses, charitable donations, interest paid on loans, unexpected losses, and interest from government savings plans. Items that can be deducted include: household energy-saving expenses, child and elderly care expenses, and foreign income taxes paid. The balance after deducting these items from the total income is the actual taxable income. The tax is calculated based on the progressive tax rate of the difference, and is levied annually and reported by the individual. Families can adopt the joint reporting method of the couple.

Corporate income tax

The taxable objects of corporate income tax include: interest, dividends, rental royalties, labor income, trade and business income, capital gains, and other income that is not personal income. Actual taxable income refers to the income after the total income that is not included in the company's income items is deducted as legal deductions. The actual tax payable is the amount of tax multiplied by the applicable tax rate and then deducted from the legal deduction amount. Among them, the deductible items mainly include: operating expenses and non-operating expenses that meet the regular and necessary conditions, such as operating costs, employee wages and salaries, repair costs, depreciation, rent, interest, bad debts, legally deductible taxes paid, social insurance funds, advertising expenses, etc.; limited amortization of company start-up costs; depreciation; losses and unexpected losses; dividends between legal persons; research and development expenses, etc. The deductible items include: special purpose fuel and lubricant credits, research and development cost growth credits, foreign tax credits, property tax credits, etc.

Corporate income tax taxpayers are divided into domestic legal persons and foreign legal persons. Domestic legal persons refer to companies established or organized in the United States in accordance with federal or state laws, including legal persons invested by the government. Legal persons other than domestic legal persons are foreign legal persons. Domestic legal persons shall pay taxes on their worldwide income, while foreign legal persons shall pay taxes on their income related to trade and operations in the United States, as well as income derived from the United States, although not related to their trade and operations in the United States during the taxable year. Corporate income tax adopts a progressive tax rate.