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How Does Income Tax Work In The United States?

The federal government imposes income tax in the United States on the taxable income of individuals, corporations, estates, and trusts. The Internal Revenue Service (IRS) collects taxes and administers the U.S. tax code. 

The Basics Of Income Tax

Income tax is progressive, meaning higher incomes are taxed at a higher rate. The federal marginal tax rates for 2019 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The first $9,700 of taxable income for an individual is taxed at 10%; the next $9,700 is taxed at 12%; the next $40,500 is taxed at 22%; the next $161,500 is taxed at 24%; the next $204,100 is taxed at 32%; the next $510,300 is taxed at 35%; and any income over $612,350 is taxed at 37%.  

In addition to the marginal tax rates, there is also a federal capital gains tax of 20% on profits from the sale of assets such as stocks, bonds, and real estate.  

State and local governments also impose taxes on income, though the rates and thresholds vary. Most states have a progressive income tax, though a few have a flat tax. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not have an income tax.  

Other Forms of Taxes To Consider

Payroll taxes are also imposed on wages and salaries, generally split between the employer and employee. The federal payroll tax rate for 2019 is 15.3%, with 12.4% for Social Security and 2.9% for Medicare.  

Self-employment taxes, similar to payroll taxes, are imposed on the net income of sole proprietorships and partnerships. The self-employment tax rate for 2019 is 15.3%.  

Investment income such as interest, dividends, and capital gains is subject to taxation, though the rates are generally lower than those for wages and salaries.  

The Logistical Side Of Income Tax

Several deductions and credits available to taxpayers can reduce their tax liability. Home mortgage interest, state and local taxes, charitable contributions, and medical expenses are the most common deductions. In addition, tax credits are available for various costs and activities such as education, childcare, and retirement savings.  

Income tax is generally payable quarterly, though taxpayers can elect to pay their taxes monthly or annually. Taxes are typically withheld from wages and salaries by employers, and self-employed individuals are required to make estimated tax payments throughout the year.  

The filing deadline for individual income tax returns is April 15th. However, taxpayers unable to pay their taxes in full can request an extension or arrange a payment plan with the IRS.