What exactly is subject to taxation in the United States?
It’s estimated that Americans spend over 29% of their income paying taxes each year. National authorities levy taxes at federal, state, and local levels.
This tax is imposed on gross taxable income (salary, capital gains, interest on deposits, rent, gains from a property sale, etc). Certain personal expenses may be deducted from the taxable income depending on the category of the filer. Income tax is imposed on individuals, corporations, estates, and trusts. Partnerships are not taxed as a business unit (with some exceptions of Federal income taxation), but instead, their partners are taxed on their shares of partnership income.
The amount of income tax depends on how much you earn. The United States has a progressive tax system, meaning people with higher taxable incomes pay higher federal income tax rates. The U.S. currently has seven federal income tax brackets, with rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, President Joe Biden has recently proposed raising the top bracket to 39.6%. The lowest tax rate applies to individuals who earn $0 – $10,275, the highest is for those whose income exceeds $539,900.
Payroll taxes are levied to fund the federal Social Security program, the hospital insurance portion of Medicare, and the federal unemployment insurance program. Some states and municipalities may have additional payroll taxes for short term disability, paid family medical leave or other programs. They are typically paid for via direct contributions from employers, as well as deductions from employee wages. Payroll taxes have flat rates and are sent directly to the social program for which they are intended. Some types of payroll taxes have a wage base limit, after which the tax is no longer deducted from the employee’s wages for the remainder of the year. The current FICA (Federal Insurance Contributions Act) tax rate is 15.3%. It is paid evenly between employers and employees, each side contributes 7.65% per payroll cycle.
Self-employment tax is an aggregated tax consisting of social security (old-age, survivors, and disability insurance) and taxes for Medicare (hospital insurance). It applies to individuals registered as private entrepreneurs or independent contractors. The current self-employment tax rate is 15.3%. US citizens pay self-employment tax if their net earnings from self-employment exceed $400 or if they have church employee income of $108.28 or more.
Sales taxes are paid on purchased goods and services. The seller collects it at the time of the sale. They are calculated automatically as a percentage of the price paid. There is no national standard sales tax rate in the USA. Sales taxes vary by state and municipality, ranging from 2.9% to 7.25% at the state level. In some states, there are no sales taxes at either the state or local level. In 12 US states, combined sales taxes (state + local) exceed 8%. Taxable items also vary among the states. Numerous categories of goods and services are either exempt from sales tax or taxed at reduced rates. The purchase of goods for further manufacture or resale is uniformly exempt from sales tax. Most jurisdictions also exempt basic items like food, prescription medications, and many agricultural supplies from sales tax.
States typically tax certain purchases and services, including gasoline and diesel fuel, coal, kerosene, cigarettes, beer and alcohol, firearms and ammunition, sports wagering, indoor tanning services, etc. Such taxes may be imposed on the manufacturer, retailer or consumer, depending on the specific product or service. Excise taxes are often combined with sales taxes on a single purchase. They are primarily paid by businesses, usually increasing prices for consumers indirectly. Excise taxes may be calculated as a percentage of the price or there may be a fixed cost per unit.
Property taxes are usually imposed by local authorities to fund community services. One of the most common ways state and local governments use revenue from property taxes is to fund public school systems. These taxes are based on the property’s market value and can be deducted in many cases if they are used to promote the “general public welfare”. Property taxes are most often levied on real estate, but can also apply to cars and other property types. Nationwide, the effective property tax rate is about 1.1% of the average home value.
This controversial tax is levied on your right to transfer property at your death. Cash, securities, insurance, real estate, and business interests are among the items considered part of an estate. Thankfully, the threshold when this tax applies is quite high – $5.34 million. Therefore, most Americans are exempt from paying the federal estate tax. At the same time, some states have a related inheritance tax, where the rate you pay depends on your family or other relation to the deceased person. The highest estate tax rate charged at the federal level is 40%. States may have lower rates and different requirements for the minimal estate value.
The tax applies to valuable gifts such as company shares, cars, property, or cash. Therefore, the IRS generally isn’t involved unless a gift exceeds $16,000. The person who makes the gift files the gift tax return, but not the recipient. If you give any person more than $15,000 in cash or assets in a year, you need to file a gift tax return. However, there’s a lifetime exclusion of $12.06 million in gifts per recipient. Thus, filing a gift tax return does not necessarily mean paying a gift tax. Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Parents generally won’t owe a tax payment unless gifts to their children for the year push them beyond their lifetime gift tax exclusion limit. Gifts to nonprofits are considered charitable donations, rather than gifts.