The American Tax System: Basic Information and Structure

The tax system of the United States is complex and multi-layered. This system encompasses federal, state, and local taxation elements. Every individual and business has specific tax obligations based on their earned income. At the federal level, federal income tax is the most significant component of this system, collected and regulated by the Internal Revenue Service (IRS).

In this article, we will explore the fundamental components of the American tax system, and discuss state-level tax rates, benefits, and the importance of seeking expert assistance with tax matters.

Overview of the American Tax System

The American tax system incorporates federal, state, and local levels of taxation. At the federal level, the IRS serves as the primary source for information regarding the tax system. The IRS collects federal income tax on all earnings and regulates the associated laws.

At the state level, each state has its own tax system. Some states impose an income tax, while others do not. Local governments typically implement consumption taxes such as sales tax and property tax.

Federal Income Tax and the Role of the IRS

Federal income tax in the U.S. is collected by the IRS. The IRS enforces tax laws and provides information to taxpayers about the system. Federal income tax is based on the amount of income earned by individuals and businesses. This tax is applied at progressive rates, meaning those with higher incomes are subject to higher tax rates.

Tax Brackets and Rates

Federal income tax is applied according to specific income brackets. Each bracket represents a certain amount of income and has a designated tax rate. For example, in 2021, the lowest tax bracket was 10%, while the highest was 37%. These rates can vary from year to year and are typically adjusted according to inflation.

Standard Deductions and Itemized Deductions

Certain deductions may apply to federal income tax. The standard deduction allows a specific amount to be subtracted from taxable income, while itemized deductions allow for the deduction of certain expenses from taxable income. These deductions can help reduce tax liability and often depend on specific conditions.

Tax Credits and Decreasing Tax Liabilities

Tax credits directly reduce tax liability. These credits can apply to specific situations, such as childcare or educational expenses. Tax credits differ from deductions in that deductions reduce taxable income, while credits reduce the actual tax owed. Therefore, tax credits are typically more valuable to taxpayers.

State and Local Tax Structure

In addition to federal taxes, there are state and local taxes in the U.S. Each state has its own tax system, which can vary significantly from state to state. Some states have no income tax, while others may have high income tax rates. Local governments often collect their own taxes, such as property tax and sales tax.

State Income Taxes and Rates

State income tax rates differ according to each state's unique regulations. Some states have a flat income tax rate, while others base their rate on income levels. For example, in California in 2021, the lowest tax rate was 1%, and the highest was 13.3%.

Sales Tax and Consumption Taxes

Sales tax is the most common form of consumption tax in the U.S. It applies to the sale of goods and services and is typically calculated as a percentage of the sale price. Sales tax rates can vary from state to state and even at the local level. Some states exempt specific products from sales tax.

Property Tax and Local Taxes

Property tax is generally collected by local governments. This tax is usually based on the value of a property and is utilized to fund local services. Property tax rates can vary locally, and in certain cases, specific properties may be exempt from this tax.

Tax System for Businesses in America

In the U.S., businesses pay federal income tax on their profits. This tax is calculated based on the company's net income, and specific deductions and credits may apply.

Corporate Tax and Business Income

Corporate tax is imposed on the income earned by a corporation. This tax is usually calculated based on the net income of the business, with specific deductions and credits available.

The Importance of Tax Planning and Expert Consultation

The tax system in the U.S. is intricate, involving numerous factors. Therefore, seeking expert tax planning and consulting services is often beneficial. Yeşim Deretam, the founder of Tam Accounting, is an IRS enrolled agent and Certified Tax Planner, making her one of the foremost experts you can reach for tax matters in America. We are here to provide you with the highest quality assistance for your tax planning needs.

Tax Return and Payment Processes

A tax return is a form documenting the income earned and taxes paid by an individual or business within a year. This form is typically completed every April and is reviewed by the Internal Revenue Service (IRS).

Conclusion and Recommendations

The American tax system is complex and consists of various elements. It is essential for individuals living or doing business in the U.S. to fully understand their tax obligations and ensure compliance. For effective management of your tax responsibilities and to achieve the best results, contact Tam Accounting. Our expert team is here to help you navigate your tax obligations efficiently. Get in touch with us today to begin your tax planning!