U.S. Income Tax

 

The U.S. Income Tax became a permanent part of the U.S. tax system in 1913. Since that year, everyone who works in the USA, regardless of whether they are a citizen or not, is obliged to pay income tax and file their tax return at the end of the fiscal year.

Depending on the amount of total earnings and taxes paid during one calendar year, you may be receiving a tax refund.

You can file a tax return and get a refund within 3 years.

If you have not paid taxes during the year, you can do so in the first quarter of next year, without interest and penalties. The deadline is April 15.

If you do not file or pay your taxes in full by the deadline, the IRS will begin to charge penalties on the amount you owe.

There are different types of income taxes in the United States:

    • Federal income tax
    • State income tax
    • Local income tax

 

Federal income tax is the tax levied by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. Federal income taxes are applied to all forms of earnings that make up a taxpayer's taxable income, such as employment earnings or capital gains. Every person that works in the USA or works for a US company has to file a Tax Return.

In addition to earnings earned through salaries, the annual income also includes income from tips, interest, dividends, rewards, etc.

There are seven tax rates  - 10%, 12%, 22%, 32%, 35% and 37%.

The federal income tax is built on a progressive tax system, where people with higher incomes are taxed at a higher rate.

The tax rate that applies to each individual is set up in a marginal tax bracket that shows the highest tax rate to be paid on income earned. In fact, the amount of taxable income that someone earns determines which tax bracket they will fall into.

The table below shows the marginal tax brackets for single taxpayers or taxpayers who are married and filing separately.

2021 Tax Brackets Single Married Filling Jointly Head of Household
10% $0 - $9,950 $0 - $19,900 $0 - $14,200
12% $9,951 - $40,525 $19,901 - $81,050 $14,201 - $54,200
22% $40,526 - $86,375 $81,051 - $172,750 $54,201 - $86,350
24% $86,376 - $164,925 $172,751 - $329,850 $86,351 - $164,900
32% $164,926 - $209,425 $329,851 - $418,850 $164,901 - $209,400
35% $209,426 - $523,600 $418,851 - $628,300 $209,401 - $523,600
37% $523,600 and over $628,301 and over $523,601 and over

Source: www.irs.gov

 

If you get a tax refund, it means you overpaid your taxes last year.

You can pay payroll tax during the year by having your employer withhold a certain percentage on behalf of the federal payroll tax, or pay it at the end of the year depending on gross earnings, which is most often the case for anyone who is self-employed.

The IRS wage and income statements are various, depending on your source of income: W-2, 1042-S, 1099 forms, 1098 –T, etc. Each income statement has to provide the following information: your full name and Taxpayer Identification Number (SSN or ITIN), your gross income for the year, and total tax withholdings. More information about income statements can be found here.

State income tax is between 3 and 6%. Each state has its State Department of Revenue which is in charge of collecting this tax, and each state independently decides about the amount of the tax refund and the deadline for the tax refund process.

State income taxes can vary considerably from one state to another. Most states have either flat or progressive income tax systems.

To better explain the system of taxation in the states, we will divide them into three groups:

  • States with no income tax - Alaska, New Hampshire, Tennessee, Florida, South Dakota, Washington, Nevada, Texas and Wyoming.
  • States with a flat tax rate – A flat tax system applies the same tax rate to every taxpayer regardless of income bracket. States that have a flat tax rate are: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah.
  • States that have a progressive tax system – all other federal states in the United States have a progressive tax system, based on the federal tax system. Tax rates depend on gross earnings and are based on the principle - the higher the earnings, the more taxes you pay. States that use this system are: Alabama, Arizona, Arkansas, California, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Vermont, Virginia, West Virginia and Wisconsin.

Most taxpayers live and work in a single state and file a state income tax return there. However, taxpayers who earn wages or income in one or more states other than where they live may be required to file state income tax returns in those states as well, unless, of course, a state is a no-income-tax state.


The Easy Tax Store offers to their clients the opportunity to file a federal and state tax refund request for one tax year for the price of one tax return, regardless of the number of states you file the return with.


 

Local income tax depends on the state that you have worked. States that charge local tax are New York, New Jersey. Pennsylvania, California, Ohio, Indiana, Maryland, Michigan, Missouri, Alabama, Kentucky, and more. In most states, this tax is non-refundable.