USA’s Tax System: A Comprehensive Guide

USA’s Tax System: A Comprehensive Guide

In the US, taxes are imposed on the majority of wealth and income sources. Here are some examples of the different kinds of taxes you could see on a daily basis:

  • Federal Income tax
  • Local and State income taxes
  • Payroll taxes, including FICA
  • Capital Gains tax
  • Estate tax

Federal Income tax

One essential part of the US government’s revenue structure is the federal income tax. Higher income earners and entities pay more taxes since the system is progressive in nature. The federal government is responsible for collecting this tax, which is levied on a variety of income streams, such as capital gains, dividends, earnings, and salaries. Federal income tax revenue is used to fund essential government programs including infrastructure, healthcare, education, and military. In order to maintain conformity and equity in the tax system, the Internal Revenue Service (IRS) is responsible for supervising the administration and execution of tax legislation. Legislative procedures are used to change tax rates and rules.

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Local and State Income Taxes

Numerous states also impose income taxes on top of the federal income tax. States levying these taxes differ greatly from one another; some have flat rates, while others have progressive tax systems akin to the federal government. Usually levied by cities or counties, local income taxes can be paid by both citizens and non-residents who work inside their borders. Local services like public safety, education, and infrastructure upkeep are funded in part by the money collected from these taxes. State legislatures set the rates and policies for income taxes at the state and local levels, taking into account the distinct financial requirements of each area.(Source:

Payroll Taxes

Payroll taxes are a substantial part of the tax system in the United States, providing revenue for social insurance programs like Social Security and Medicare. Both employers and workers are subject to these taxes, and each is required to make a partial payment. Employer and employee contributions to Social Security are 6.2% of earnings, subject to a ceiling on income; both parties’ Medicare taxes are 1.45%. Self-employed people are in charge of covering both the employee and employer costs. These crucial social safety net services, which provide payments for retirees and others in need of medical attention, are financed in large part by payroll taxes.

Capital Gains Tax

The earnings made from the sale of assets like stocks, bonds, real estate, or other investments are subject to tax known as the capital gains tax. The amount of time the asset was kept and the taxpayer’s income level are two of the variables that determine the tax rate on capital gains. With rates ranging from 0% to 20%, assets kept for longer periods of time are often subject to lower tax rates. High-income earners, however, may also be liable to an extra 3.8% tax on their net investment income. The nation’s revenue structure relies heavily on the capital gains tax to balance the creation of tax income with investment incentives.

Estate tax

In the US, estate taxes are paid when a dead person’s assets are transferred to their recipients or heirs. These taxes, which are sometimes called inheritance taxes, are levied on the fair market value of assets that are worth more than a specific amount. States may levy their own estate taxes with different exemption criteria and rates, even if federal estate taxes only apply to bigger estates. Both the federal and state governments rely on estate taxes for income creation and wealth redistribution. 

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