HOW DOES THE TAX RATE WORK IN THE UNITED STATES?

 HOW DOES THE TAX RATE WORK IN THE UNITED STATES?

The tax rate in the United States has undergone many changes. In fact, it generally follows the economic policies of successive U.S. leaders. Today, it seems to have achieved a certain stability. Federal income tax in the United States applies to all residents of the country. Its application is somewhat complex. However, there are a few fundamental elements that must be understood. This is what we will examine.

tax rate in the United States

The evolution of the tax rate in the United States

Tax brackets in the United States

We have seen changes in the federal income tax system many times throughout its history. The number of brackets and rates has evolved. The federal income tax started with seven brackets, but this number exploded to over 50 in 1920. From then until the late 1970s, there were never fewer than 20 brackets. The last major federal tax reform, the Tax Reform Act of 1986, reduced the number of brackets from 16 to two. However, this number has increased to seven over the past three decades.

The top marginal rate in US history

The top marginal federal tax rate has varied considerably over time. In the early 1960s, the top rate reached an astonishing 91%.

The Kennedy and Johnson eras reduced this rate to 70 percent. In 1981, President Reagan, a champion of liberalism, reduced the top rate to 50 percent. In 1986, he implemented a major tax reform (the Tax Reform Act) that reduced the top marginal rate to 28 percent. This reform was in line with his economic policy, which aimed to attract investment by reducing the tax burden.

Subsequent legislation raised this rate to 31% in 1991 and 39.6% in 1993. George W. Bush's tax cuts lowered the top rate to 35%. It returned to 39.6% as planned due to the American Taxpayer Relief Act of 2012. The top rate is 37% as of 2018.

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Definition of the tax rate in the United States

We're talking about federal income tax, which is the tax levied by the US Internal Revenue Service. Click here to access the official website.

It is a levy on the annual income of individuals, corporations, trusts, and other legal entities. In addition, federal income tax applies to all forms of income that make up a taxpayer's taxable income, such as employment income or capital gains.

Federal Tax vs. State Tax: What's the Difference?

The United States has a multi-tiered income tax system. Taxes are imposed at the federal (Washington) level, the state level, and sometimes the local level.

Federal and state income taxes are broadly similar in that they are applied as percentages of taxable income. However, they can differ considerably in terms of these rates and how they are applied. In addition, the type of taxable income and the system of allowable deductions and tax credits can vary greatly from state to state.

For example, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income tax. Only federal income tax applies in their case.

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The purpose of federal tax

Federal taxes are money used by the government to finance the growth and maintenance of the country. In this sense, some consider them to be "rent" charged for living in a country, or a fee for using the resources provided by a country.

When you pay taxes to the U.S. government, you are actually investing in your economy, because the government uses the funds to do things like:

Build, repair or maintain infrastructure

Funding pensions and benefits for civil servants

Provide food and housing assistance to the most deprived

Improve sectors such as education, defense, health, agriculture, utilities and public transportation

Providing emergency relief in times of disaster

The federal government's largest source of revenue comes from the income of its residents. In 2018, the latest year for which figures are available, the IRS collected nearly $3 trillion in revenue, of which individuals, estates, and trusts contributed $1.57 trillion.

How federal tax works

Tax collection

Workers receive their earnings either as net income or as gross income. Net income is the total amount earned less federal income tax. This means that the company or payer withheld the tax and paid it directly to the government on the worker's behalf.

Furthermore, all money earned, whether it is wages, a cash gift from an employer, business income, tips, gambling income, bonuses, or unemployment compensation, is income for federal tax purposes.

This is a withholding tax system where the employer deposits the tax directly into the federal government's account. A declaration is filed in April to declare the income received to confirm whether or not the tax amount is correct.

The progressivity of tax

Federal income tax is based on a progressive tax system, in which higher incomes are taxed at a higher rate. Taxpayers earning less than a government-set annual threshold pay little or no tax.

The tax rate that applies to each individual is established within a marginal tax bracket, which indicates the tax rate on earned income. In fact, the amount of taxable income you earn determines the tax bracket in which you are taxed.

Tax brackets

Tax brackets determine how much money you have to pay to the IRS each year. Tax rates in the United States therefore depend on the tax brackets in effect.

The amount you pay in taxes depends on your income. If your taxable income increases, the taxes you pay will increase.

The tax system in the United States is progressive, meaning your income is taxed at different levels.

For example, if a single person has a taxable income of $50,000 in 2020, not all of it is taxed at 22%. A portion will be taxed in lower brackets (12% and 10% brackets).

Each bracket has its own tax rate. The bracket you fall into also depends on your status: single, married filing jointly, married filing separately, or head of household.

The tax bracket your highest dollar falls into is your marginal tax bracket.

This tax bracket is the highest tax rate, which applies to the top portion of your income.