Taxes in the United States

Written by Lais Cattassini Moderated by Oleksandra Dosii

Lais Cattassini

Lais is a Brazilian journalist and copywriter with over 17 years of experience, writing about things she knows really well (travelling, cinema, social media trends) and things she loves learning about.

Oleksandra Dosii

Oleksandra is a dedicated marketer with a passion for growing HR-tech products. She believes content marketing is about delivering high-quality content that provides value—not just generating leads. Since 2016, Oleksandra has been involved in tech talent relocation.

Last update: September 15, 2024

Next update: Scheduled for February 1, 2025

Income tax is the largest source of federal revenue. Individuals and businesses pay taxes based on their income, with progressive tax rates ranging from 10% to 37% for individuals. Businesses face a flat corporate tax rate of 21%.

Payroll taxes are used to fund Social Security and Medicare. Employees and employers each contribute a percentage of wages — 6.2% for Social Security (up to a wage limit) and 1.45% for Medicare (with an additional 0.9% Medicare tax for high earners).

Companies are taxed on their profits. Taxable income is calculated after deducting allowable expenses with a standard corporate tax rate.

Most states levy an income tax on individuals and businesses as well, with rates and structures varying widely. Some states, like Florida and Texas, have no income tax.

The Internal Revenue Service (IRS) is the federal agency responsible for administering and enforcing tax laws in the US. It handles tax collection, processing returns, and providing guidance on tax rules. In addition, each state has its own department or agency for managing state taxes, including income, sales, and property taxes.

What is the income tax in the United States?

The U.S. uses a progressive tax system for individuals, meaning that tax rates increase as income increases. The federal income tax rates range from 10% to 37% across different income brackets:

You pay tax as a percentage of your income. As your income goes up, the tax rate on the next layer of income is higher. Taxpayers only pay the higher rate on income within the higher bracket, not on their entire income.

Individuals file their taxes based on their filing status, which affects their tax brackets and deductions. Common statuses include Single, Married Filing Jointly, Head of Household, and Married Filing Separately.

State income tax varies by state. Some states, like California and New York, have progressive tax systems similar to the federal system, while others have flat tax rates or no income tax at all (e.g., Florida and Texas).

Some cities or counties also impose local income taxes in addition to state and federal taxes. These can be a flat rate or progressive. For example, New York City has a progressive local income tax with rates ranging from 3.078% to 3.876%, depending on income levels.

Social Security contributions

Social Security is primarily funded through payroll taxes levied on earnings from employment. These taxes are collected under the Federal Insurance Contributions Act (FICA) for employees and the Self-Employed Contributions Act (SECA) for self-employed individuals.

As of 2024, the Social Security tax rate is 12.4% of earnings. This is split equally between employees and employers, with each paying 6.2%. Self-employed individuals pay the full 12.4% themselves but can deduct half of this amount when calculating their income taxes.

Social Security taxes are only applied to income up to a certain limit, known as the wage base limit. For 2024, this limit is $168,600. Income above this threshold is not subject to Social Security tax.

Online tax calculator for taxes in the United States

Calculating taxes in the United States can be challenging, as there are state differences that need to be taken into account.

When it comes to federal taxes, you must understand your income, which includes wages, bonuses, interest, dividends, rental income, and other sources of income. You can calculate your net income here.

The IRS also provides a tool to estimate how much of your income will be subject to federal taxes or how much you might be entitled to receive as a refund.

Annual tax returns in the United States

Taxpayers in the United States must report all sources of income, including wages, salaries, interest, dividends, and capital gains. You have to calculate how much tax you owe based on income and applicable tax rates. It is also your responsibility to calculate deductions and lower your tax liability through credits.

There are different forms that need to be filled out to file tax returns. Form 1040 is the standard form used by most individuals, but there are different versions for seniors or non-resident aliens who have U.S. income.

Depending on the complexity of the tax situation, taxpayers may need to attach additional schedules and forms for deductions, business income, or for reporting capital gains or losses.

There are five filing statuses:

• Single: If you are unmarried or legally separated.
• Married Filing Jointly: Couples file one return together.
• Married Filing Separately: Spouses file separate returns, but this often results in a higher tax bill.
• Head of Household: For unmarried individuals supporting a qualifying person.
• Qualifying Widow(er): For those whose spouse died within the past two years and have a dependent child.

The IRS recommends filing your taxes electronically for faster processing and quicker refunds (usually within 21 days). Tax preparation software such as TurboTax, H&R Block, or IRS Free File can guide you through the process. Certified public accountants (CPAs) or tax preparers can assist with more complex returns and provide tax advice.

You can also mail your tax return to the IRS. It’s important to use the correct mailing address and ensure that all forms are completed accurately.

The tax year in the United States is from January 1^st to December 31^st and the deadline for filing federal income tax returns is April 15. If that date falls on a weekend or holiday, the deadline is extended to the next business day.

How to pay less taxes

Deductions

There are two main types of tax deductions in the United States: the standard deduction and itemised deductions.

The standard deduction is a fixed amount you can subtract from your income, which is available to all taxpayers. The amount varies depending on your filing status. For single individuals, the standard deduction is $13,850. For people who are married and filing jointly, the deduction is $27,700. For the head of the household, the amount is $20,800

If your itemised deductions don’t exceed the standard deduction, it’s usually better to claim the standard deduction. Common itemised deductions include mortgage interest, state and local taxes, medical and dental expenses, charitable contributions, and losses from federally declared disasters.

Tax credits

Tax credits are more valuable than deductions because they reduce taxes dollar for dollar. There are two types of tax credits: non-refundable and refundable.

Refundable tax credits can reduce your tax liability to below zero, resulting in a refund. Examples include:

• Earned Income Tax Credit (EITC): Designed for low- to moderate-income taxpayers, the EITC is refundable, meaning you could receive a refund if the credit exceeds your tax liability.
• Child Tax Credit (CTC): Up to $2,000 per qualifying child under age 18, and a portion may be refundable.
• American Opportunity Credit (AOTC): For undergraduate education expenses, up to $2,500 per student. Up to 40% ($1,000) of the credit is refundable.

Non-refundable tax credits can reduce your tax liability to zero, but any excess amount won’t result in a refund. Some examples are:

• Lifetime Learning Credit: Up to $2,000 per tax return for postsecondary education, covering tuition and fees.
• Saver’s Credit: For retirement contributions by low- to moderate-income individuals, the Saver’s Credit can reduce taxes by up to $1,000 ($2,000 for married couples).
• Adoption Credit: Up to $15,950 in 2024 for adoption-related expenses.
• Residential Energy Credit: For energy-efficient home improvements (e.g., installing solar panels or energy-efficient windows), up to 30% of the cost.

Tax allowances

Tax allowances affect the amount of tax withheld from your paycheck throughout the year. The more allowances you claim, the less tax is withheld, resulting in a higher paycheck (but possibly a lower refund). Form W-4 is used to claim allowances.

Contributing to tax-advantaged accounts can reduce your taxable income and help you save for retirement or future needs.

Contributions to traditional Individual Retirement Accounts (IRAs) or 401(k) plans reduce your taxable income. You can contribute up to $7,000 to an IRA (or $7,500 if you’re 50 or older) and up to $23,000 to a 401(k).

Contributions to a Health Savings Account (HSA) are also tax-deductible, and withdrawals for qualified medical expenses are tax-free. You can contribute up to $4,150 (individual) or $8,300 (family).

Flexible Spending Account (FSA) contributions also reduce your taxable income, and withdrawals for qualified medical expenses are tax-free. The maximum contribution is $3,050.

Talk to a tax advisor

It is always advisable to reach out to tax experts to discuss your specific situation and avoid paying more taxes than necessary. By consulting with an advisor or accountant, you also ensure you are paying your dues correctly, avoiding penalties.

Other taxes in the United States

In the United States, individuals are subjected to various types of taxes in addition to income taxes. These taxes are levied by federal, state, and local governments to fund public services and infrastructure:

Payroll taxes

Payroll taxes are collected from employers and employees to fund specific government programs, including Social Security and Medicare. These taxes are typically deducted directly from employees' paychecks.

Sales tax

Sales taxes are levied by state and local governments on the sale of goods and services.

Rates vary by state and locality, with rates ranging from 0% to over 10%. For example, California has a statewide base rate of 7.25%, while some cities may impose additional taxes, bringing the total higher.

Property tax

Property taxes are imposed by local governments (cities, counties, and school districts) on the value of property owned by individuals and businesses.

It funds local services, including public schools, police and fire departments, and infrastructure maintenance.

Rates vary by locality, but the tax is typically based on a percentage of the property’s assessed value. Local assessors determine the value of the property for tax purposes, and property owners may be able to challenge assessments if they believe the value is too high.

Excise taxes

Excise taxes are taxes on specific goods or activities. These are often referred to as "sin taxes" when applied to products considered harmful, such as alcohol or tobacco.

Capital gains tax

A tax on the profit from the sale of certain types of assets, such as stocks, real estate, and other investments.

The federal capital gains tax rate depends on how long you’ve held the asset. Long-term capital gains (held for over a year) are taxed at lower rates (0%, 15%, or 20%) compared to short-term gains, which are taxed at ordinary income tax rates. Some states also tax capital gains.

Estate and inheritance taxes

Taxes are imposed on the transfer of wealth upon an individual’s death.

Gift tax

A tax on large monetary gifts is given during an individual’s lifetime.

Tax treaties with the United States

The United States has entered into tax treaties with several countries to clarify tax rules and prevent such double taxation, provide tax relief, and promote international trade and investment.

The IRS provides a detailed list of the countries with tax treaties with the US.