Overview of the U.S. Tax System

The U.S. tax system is complex, with multiple layers and types of taxes imposed at the federal, state, and local levels. Here’s a concise summary of its main features:

Main Elements of the Federal Tax System

• Individual Income Tax:S. citizens and resident aliens are taxed on their worldwide income. Taxable income is calculated as total income minus certain exclusions, exemptions, and deductions. The tax is assessed using graduated (progressive) tax rates, meaning higher income is taxed at higher rates. There is also an alternative minimum tax for some individuals. Tax credits can reduce the amount owed.
• Corporate Income Tax: Corporations are taxed separately from individuals. The federal corporate income tax rate is currently 21%, with additional state-level corporate taxes that vary by state.
• Payroll Taxes: These are taxes on wages and self-employment income to fund social insurance programs like Social Security and Medicare.
• Estate and Gift Taxes: These apply to the transfer of wealth, either at death or as gifts during life.
• Excise Taxes: Imposed on specific goods and services, such as gasoline, alcohol, and tobacco.

Progressive Tax Rates and Brackets

• The federal individual income tax is progressive, with seven tax brackets ranging from 10% to 37%. Each bracket applies only to income within a certain range, so only the portion of income within a higher bracket is taxed at that rate—not the entire income.
• Tax brackets and standard deductions are adjusted annually for inflation.

Other Key Features

• Self-Assessment: Taxpayers are responsible for filing tax returns and calculating their own tax liability. Taxes may be withheld from income (e.g., wages), and estimated taxes may be required for self-employed individuals.
• Capital Gains vs. Ordinary Income: Capital gains (profits from the sale of investments) are generally taxed at lower rates than ordinary income such as wages.
• State and Local Taxes: In addition to federal taxes, most states and some localities impose their own income, sales, and property taxes, which can vary significantly.
• Foreign Income:S. citizens and residents are taxed on their worldwide income, but credits or exclusions are available for taxes paid to other countries.

Summary Table

The U.S. tax system is designed to be progressive and to fund a wide range of government activities at every level.