In The United State of America, Tax is imposed on both federal and state level. Federal and state taxes are completely separate and each has its own authority to charge taxes. The federal government does not have the right to interfere with state taxation. Each state has its own tax system that is separate from the other states. Within the state there may be several jurisdictions that also charge taxes. Local Government bodies like Municipalities, Regional Municipalities, Rural Communities (RC), and Local Service Districts (LSD) impose their taxes separately like property Tax, licensing fees etc. where Individual income taxes, Payroll taxes, and corporate income taxes are main sources of federal tax revenue, Sales tax and Income Tax are main sources for State revenues while Property taxes is the main revenue source for local governments. There are so many taxes levied in the US, Some common and main taxes levied in the US are as follows:
| Sales Tax | -Commonly used by States and Local Government to raise revenue ,
-State without general sales taxes are Alasa ,Delaware, Montana, New Hampshire, Oregon |
| Sin Tax | -Levied upon luxury goods , luxury car , Jewelry and vice items dangerous to one’s health,
-Imposed to discourage patronizing certain products like alcohol , tobacco etc. |
| Travel Tax | -Government Mandated Transport Tax For Traveler in US,
-Used to fund the federal aviation administration (FAA), -Airlines Charges 7.5% On Base Airfare |
| Capital Gain Tax | -Imposed on profit made on investment , sale of rent estate properties ,
-Long term capital gains are taxed at a lower rate -Short term capital gains are taxed at same rate as Income tax |
| Inheritance / Estate Tax | -Paid on the transfer of properties from a deceased person to his heirs ,
– Paid by Heirs , -Prevent the transmission of tax-free wealth in America’s most affluent families |
| Income Tax | -Required of all workers regardless of employment status
-Largest souse of revenue for the government |
| Payroll Tax | -Payroll tax is not a single tax, but a blanket term used to refer to all taxes paid on the wages of employees.
-It includes contribution to Medicare, Social Security , disability , unemployment , retirement |
| Property Tax | -Another main sources of the government income
-Levied upon real- estate or personal properties |
Sales Tax.
Sales taxes are placed on the sale or lease of goods and services .There is no national sales tax in the US and therefore no standard rate is there. Sales tax is a state tax and is governed at the state level and varies from state to state as well as within the state. For example, NY State Sales Tax is 7% and NJ is 3%, but Albany has 8% sales tax while Syracuse has only 7%. As of 2017, 5 states (Alaska, Delaware, Montana, New Hampshire and Oregon) do not levy a statewide sales tax. California has the highest base sales tax rate, 7.25%.
Taxability of items is also different in each state. For example, in NY gum is taxed, but milk is not. In NJ food is taxed, but clothes are not. States may grant local governments the authority to impose additional general or selective sales taxes. Within the state, municipalities have the right to raise the sales tax above the state limit. Local governments in 35 states impose additional sales or use tax ranging from 1 to 5 percent.
Sales Tax Vs. Use Tax
If your business has a physical presence in a state, you’re generally required to collect sales tax; if you don’t have a physical presence in a state but do have an obligation to collect tax there, you’ll typically have to collect seller use tax. When a seller makes a sale in a state where it doesn’t have nexus, it typically can’t be required to collect “sales tax.” However, that doesn’t mean the transaction is somehow magically exempt. If a seller doesn’t collect sales tax on a taxable sale, the purchaser or consumer is required to remit corresponding use tax to state and/or local tax authorities.
Both businesses and individuals can owe consumer use tax. A business also owes consumer use tax when it uses an item purchased exempt from tax for resale. For example: If a café makes an exempt purchase of mugs to use at the café, and then gives some of those mugs to employees as gifts, it owes the state use tax on those mugs.
Value-Added Tax
Among the states in the US, only Michigan taxed a form of VAT called the single business tax. It later replaced this with the Michigan business tax. Meanwhile, Puerto Rico has been imposing a 10.5% VAT since 2006. There is no value added tax in the United States. Though there have been proposals to replace some Federal taxes with a value added tax.
Payroll Tax
The day you hire your first employee, you become responsible for payroll tax. Payroll tax is not a single tax, but it is a blanket term used to refer all taxes paid on the wages of employees like FICA Tax, FUTA tax and other State & Local Taxes. If you have employees, you are going to be responsible for deducting portion of employee wages and to pay payroll taxes.
If you run a small business but you don’t have employees, you’ll still have to remit payroll taxes—for yourself. This is called self-employment tax, and is effectively Medicare plus Social Security for yourself (which amounts to 15.3% of your net business income).
FICA tax: FICA stands for the Federal Insurance Contributions Act and it covers social security and Medicare. This cost is shared by employer and employee in equal proportion. The employer portion is 6.2% for social security and 1.45% for Medicare:
i. Social Security payroll tax
Employers and employees share in the Social Security tax, with each paying half of the total liability until the employee reaches the wage base limit of $142,800 (as of 2021).
ii. Medicare payroll tax
Medicare tax is also split evenly between employers and employees, but unlike Social Security, it doesn’t have an earnings limit. However, certain employees making more than $200,000 per year may have to pay an additional Medicare tax, which employers aren’t required to match.
Federal Unemployment taxes (FUTA)
FUTA tax covers unemployment insurance. The total amount is 6.0%. However, most states have a 5.4% credit, meaning most employers only pay 0.6%. Employers alone pay federal unemployment tax (FUTA) on the first $7,000 that every employee earns. The same is true for state unemployment programs, except the wage base limits vary, and in a few states, employees also contribute to the tax. Employers who pay their state unemployment on time and aren’t in a credit reduction state may be eligible for a lower federal unemployment tax rate.
State and local payroll tax
Some states and municipalities have additional payroll taxes for short term disability, paid family medical leave or other programs. State unemployment tax rates typically vary based on an employer’s previous claims history. As such, a business with many previous employees who have filed unemployment claims will tend to have a higher rate than a business that has none. Other state and local payroll tax rates differ by location.
Income Tax
Every person who earns income in the U.S. is supposed to pay income tax on both the federal and state level. Besides Federal income tax, Each state also has its own form of income tax that employers withhold from your salary . If you earn over a certain amount, $6,750, you must file both federal and state taxes before April 15th of each year.
State Income tax Taxes vary by state to state and even tax system is different in each state. Where Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington) do not have an income tax system , New Hampshire only tax unearned income .Nine states (Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah) have a flat-rate income tax system ( all income levels are taxed at the same rate). The flat rates vary and not the same in all these nine states. Other 35 states and the District of Columbia have a progressive income tax system, which means that a taxpayer’s income is taxed in various brackets at different rates that increase as the taxpayer’s annual income increases. Usually, state income tax laws are more simplified compared to the federal tax code, with fewer tax brackets and generally lower tax rates. Tax brackets vary by each state and certain states even have tax laws that routinely adjust tax brackets and rates based on inflation.
Federal income taxes are applied to all forms of income that make up a taxpayer’s taxable income, like wages or capital gains. State income taxes are lower than federal income taxes. Mainly because the states also assess various types of property taxes, sales taxes, and even locality taxes in some states.
Corporations have to pay tax on their taxable income independently of their shareholders. Shareholders are also subject to tax on dividends received from corporations. But partnerships are not subject to income tax, but their partners need to add their partnership share while computing their income tax. Corporations owned by U.S. citizens or residents are treated similarly to partnerships. A limited liability company and certain other business entities may elect to be treated as corporations or as partnerships. States also follow such characterization. Charitable organizations are subject to tax on business income.
Foreign individuals and corporations are subject to federal income tax only on income from U.S. sources. States levy tax on individuals & corporations residing outside the state on wages or business income within the state. While making payment to non-residents, Payers withhold federal or state income tax on the payment. Federal withholding of 30% on such income may be reduced under a tax treaty; it is not applicable in case of state taxes.
An alternative minimum tax (AMT) is imposed at the federal level on a somewhat modified version of taxable income. The tax applies to individuals and corporations. The tax base is adjusted gross income reduced by a fixed deduction that varies by taxpayer filing status. Itemized deductions of individuals are limited to home mortgage interest, charitable contributions, and a portion of medical expenses. AMT is imposed at a rate of 26% or 28% for individuals and 20% for corporations, less the amount of regular tax. A credit against future regular income tax is allowed for such excess, with certain restrictions.
Many states impose minimum income taxes on corporations or a tax computed on an alternative tax base. These include taxes based on capital of corporations and alternative measures of income for individuals.
Corporate Tax
Corporations are a separate legal entity and are subject to corporate tax on taxable income. Corporate tax rates are different from personal tax rates. Corporate earnings are subject to double taxation. Corporations pay taxes on their earnings and then with after tax income they pay stockholders dividends, which are subject to capital gains tax. The dividends must be reported on the stockholders personal tax form and are taxed at capital gains tax rates. This is what is commonly called double taxation.
Sin Tax
Another common type of tax is a Sin Tax. It is a kind of excise tax, It can be ad valorem taxes or specific or fixed taxes: Both the federal and state governments levy additional Sin Tax on the purchase of “vice” items like tobacco and alcohol ,cigarettes and gambling winnings etc. The Purpose of sin tax collection is to discourage people from patronizing these “vice” products .This tax accounts for large revenues in some U.S. states, such as Nevada, Rhode Island, and Delaware.
Travel Tax
Before people start packing their bags, they need to be aware of Travel Tax. Travel tax is collected by Local governments and it is in addition to the sales tax the state collects. Travel taxes can come in different forms. Common types of travel taxes are car rentals & lodging. This tax can also be a fixed amount or a percentage. For example, Georgia charges extra $5 per room as lodging tax. Idaho levies 2%. There are cases when the state forgo sales tax but charges users with a lodging tax. An example is Delaware. Those who like to use car rentals should also consider the applicable taxes. Like lodging taxes, it can be a percentage or a fixed or flat fee. In Minnesota’s case, it levies both types. So far, there are 22 states that impose a tax for lodging accommodations and 38 states that collect tax on rented vehicles.
Capital Gains Tax
All financial gains from earnings from investments have corresponding capital gain taxes. They also include taxes from dividends and interests accumulated from bank accounts. The capital gains tax rate depends on the investors’ tax bracket and the duration of the investment. In the United States, the government imposes taxes on short-term capital gains at the same rate as income tax and on long-term capital gains at a lower rate.
Inheritance/Estate Tax
The inheritance/estate tax refers to the tax paid on the transfer of properties from a deceased person to their heirs. The heirs who benefit from the transfer of the property from a deceased person pay this tax to the government. While the federal government imposes estate taxes, it is also imposed by the State to some level. Estate taxes can be a significant tax burden to the bereaved. That’s why the government introduces an exemption amount. It is now about $10 million per person throughout their lifetime. They can also use it to claim exclusions for the gift and generation-skipping transfer (GST) taxes. In other words, unless the deceased has vast wealth, there’s a good chance the heirs don’t need to pay any estate tax at all. Estate tax revenues made up 0.5 percent of total federal receipts in 2019.
Property Taxes
Taxpayers pay Property Taxes on real estate or personal properties. Local governments collect these taxes as a source of revenue. In computing property taxes, the government multiplies the fair market value of the property with the tax rate applicable to a certain city or municipality. Property taxes imposed by local governments range from 0.70% to 3.6%. Taxpayers can also claim property tax as part of their itemized deductions, which can then reduce their federal income tax. To be eligible, they need to meet certain requirements For example; their itemized deductions should be more than their standard deductions. There’s also a combined tax limit of $10,000 for both property and income taxes, according to the new law. A non-payment of the property tax may result in a lien, which can decrease a person’s chances of selling the home or land fast.
Excise Tax
Excise taxes are imposed at the federal and state levels on a variety of goods, including alcohol, tobacco, tires, gasoline, diesel fuel, coal, firearms, telephone service, air transportation, unregistered bonds, and many other goods and services. Some jurisdictions require that tax stamps be affixed to goods to demonstrate payment of the tax. Excise may be imposed on the sales price of goods or on a per unit or other basis. Excise tax may be required to be paid by the manufacturer at wholesale sale, or may be collected from the customer at retail sale.
Custom Duties
The United States imposes tariffs or custom duties on imports of goods. The duty is levied at the time of import. Customs duties vary by country of origin and product. Goods from many countries are exempt from duty under various trade agreements. Certain types of goods are exempt from duty regardless of source. Customs rules differ from other import restrictions. Failure to properly comply with customs rules can result in seizure of goods and criminal penalties against involved parties. United States Customs and Border Protection (“CBP”) enforces customs rules.
Goods may be stored in a bonded warehouse or a Foreign-Trade Zone in the United States for up to five years without payment of duties. Goods must be declared for entry into the U.S. within 15 days of arrival or prior to leaving a bonded warehouse or foreign trade zone. Many importers participate in a voluntary self-assessment program with CBP. Special rules apply to goods imported by mail. All goods imported into the United States are subject to inspection by CBP. Some goods may be temporarily imported to the United States under a system similar to the ATA Carnet system. Examples include laptop computers used by persons traveling in the U.S. and samples used by salesmen.
Tax Administration in US -The Internal Revenue Service (IRS)
Congress established the Office of the Commissioner of Internal Revenue under the Department of the Treasury. The Internal Revenue Service (IRS) administers and enforces U.S. federal tax laws. The Commissioner of Internal Revenue is the head of the Internal Revenue Service (IRS), an agency within the United States Department of the Treasury. The IRS functions under four major operating divisions: Large Business and International (LB&I), Small Business/Self-Employed (SB/SE), Wage and Investment (W&I), and Tax Exempt & Government Entities (TE/GE). To administer state revenue, every state has its own revenue department to administer the State Revenue.
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