U.S.

Taxation: A Comprehensive Reviewer

1. Overview of Taxation in the U.S.

 Definition of Taxation: A system through which the government collects revenue to fund public
services and infrastructure.

 Key Tax Authorities:

o Internal Revenue Service (IRS): The federal agency responsible for administering and
enforcing federal tax laws.

o State and Local Governments: Each state has its own taxation system, and local
governments may levy additional taxes.

2. Types of Taxes in the U.S.

 Federal Taxes: Collected by the IRS.

o Income Tax: The largest source of federal revenue, based on individual and corporate
income.

o Payroll Taxes: Taxes for Social Security and Medicare.

o Excise Taxes: Levied on specific goods (e.g., gasoline, alcohol).

o Estate and Gift Taxes: Imposed on the transfer of wealth.

 State and Local Taxes:

o State Income Tax: Some states impose income tax (e.g., California, New York).

o Sales Tax: Imposed on goods and services, typically by states and municipalities.

o Property Tax: Levied by local governments on real estate.

3. Income Tax

 Progressive Tax System: The U.S. has a progressive tax structure, meaning the more income you
earn, the higher percentage of tax you pay.

o Individual Income Tax: Applies to individuals and is based on taxable income.

 Filing Status:

o Single, Married Filing Jointly, Married Filing Separately, Head of Household, Qualifying
Widow(er).

 Tax Brackets for Individuals: Ranges from 10% to 37% based on income levels for tax year 2023.

 Deductions and Exemptions:

o Standard Deduction: The amount a taxpayer can subtract from taxable income without
itemizing deductions (e.g., $13,850 for single filers in 2023).

o Itemized Deductions: Includes deductions for mortgage interest, medical expenses, and
state/local taxes.

 Tax Credits: Reduce the amount of tax owed (e.g., Child Tax Credit, Earned Income Tax Credit).

4. Payroll Taxes

 FICA (Federal Insurance Contributions Act): Includes Social Security and Medicare taxes.

o Social Security Tax: 6.2% on wages up to a certain threshold ($160,200 for 2023).

o Medicare Tax: 1.45% on all wages, with an additional 0.9% tax for high earners (over
$200,000 for single filers).

5. Sales Tax

 State Sales Tax: Sales tax rates vary by state and locality (e.g., 7.25% in California, 6% in New
York).

 Goods and Services: Sales tax applies to goods and some services.

 Exemptions: Some items (e.g., groceries, prescription drugs) are exempt in certain states.

6. Capital Gains Tax

 Short-Term Capital Gains: Taxed at ordinary income tax rates for assets held one year or less.
  Long-Term Capital Gains: Taxed at preferential rates of 0%, 15%, or 20% depending on the
taxpayer’s income level.

 Net Investment Income Tax (NIIT): A 3.8% tax on net investment income for high-income
earners.

7. Corporate Taxes

 Corporate Tax Rate: A flat rate of 21% for most corporations under the TCJA.

 Qualified Business Income Deduction: A 20% deduction on pass-through business income (for
sole proprietors, partnerships, S corporations).

 Double Taxation: Corporations are taxed on their income, and shareholders are taxed again
when dividends are paid.

8. Estate and Gift Taxes

 Estate Tax: A tax on the transfer of the estate of a deceased person.

o Exemption: The exemption for estate taxes is $12.92 million per individual for 2023.

o Tax Rates: Progressive rates up to 40%.

 Gift Tax: Imposed on gifts made during a person's lifetime.

o Annual Exclusion: Up to $17,000 per recipient can be gifted tax-free in 2023.

9. Tax Filing and Payment

 Tax Year: The calendar year (January 1 to December 31), unless the taxpayer requests a fiscal
year.

 Filing Deadline: April 15 of the following year (e.g., April 15, 2024, for the 2023 tax year).

 Electronic Filing: The IRS encourages e-filing, which is faster and more efficient.

 Estimated Taxes: Self-employed individuals and those with income not subject to withholding
may need to pay estimated taxes quarterly.

10. Tax Credits and Deductions

o Child Tax Credit, Education Credits (American Opportunity Credit, Lifetime Learning
Credit), Energy-efficient Home Credit.

 Tax Deductions: Reduce taxable income, such as:

o Student Loan Interest Deduction.

o Mortgage Interest Deduction.

11. Tax Planning and Strategies

 Tax-Deferred Growth: Contributions to retirement accounts like IRAs and 401(k)s grow tax-
deferred until withdrawal.

 Tax-Exempt Accounts: Contributions to Roth IRAs and other tax-exempt accounts may grow tax-
free.

 Tax Loss Harvesting: Selling investments at a loss to offset capital gains and reduce taxable
income.

12. Common Tax Issues

 Audit Process: The IRS can audit taxpayers to verify the accuracy of returns and ensure
compliance.

 Penalties: Failure to file or pay taxes on time can result in penalties, interest, and other
consequences.

13. Recent Tax Law Updates

 Tax Cuts and Jobs Act (TCJA): Passed in 2017, it lowered the corporate tax rate and made
changes to individual income tax rates and deductions.

 American Rescue Plan (2021): Provided additional stimulus checks, expanded child tax credits,
and enhanced unemployment benefits.