Taxation in the United States

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(Federal payroll?) taxes in the United States are primarily collected by employers, for the U.S. Internal Revenue Service.

As of June 2001, the income tax forms the bulk of taxes collected by the U.S. government. Depending on individual income, it ranges from nothing to 35% of one's income. It is assessed on most publicly held corporations, as well, so that the dividends paid to stockholders are subject to a double tax.

The U.S. government rewards behavior by reducing taxes on it. The most famous reduction in taxes is that income used to pay mortgage interest on a personal home is exempted from taxes. An additional $2,000/year of income per person may be placed in an individual retirement account, and this may be deducted from taxable income.

There are two ways to calculate income tax. The regular way is based on the gross income minus the deductions from tax shelters and a marginal tax percentage is applied according to the tax payer's income bracket.

The second way known as AMT (Alternate Minimum Tax) is based on the gross income plus any tax preference items such as paper gain on exercised stock options with no deduction from any tax shelters. The lack of tax shelter and added unrelealized income almost guarantee a much higher taxable income in the alternate calculation. This higher income base is multiplied by 24% or 28% depending on taxpayer income. The tax payers pay the higher of the two computed tax liabilities. In the tax year 2000, many tax payers in the Silicon valley were caught unprepared by the AMT due to the sudden stock market crash. For example, someone exercised a 10,000 share Nortel stock option at $7 when the stock price was at $87, the paper gain was $80 per share or $800,000. Without selling the stock, the stock price dropped to $7. In effect his paper gain is $800,000 but his real gain is $0. Now the tax due from AMT comes to $192,000 which is 28% of $800,000. It takes miracle to pull a fifth million dollars out of an empty pocket. The AMT was designed to prevent people from using loopholes in the tax law to avoid tax. However, the inclusion of unrealized gain, as described in the example above, does impose difficulties for people who cannot come up with money to pay tax on income that they have not earned yet. As a result, the congress has taken action to modify the AMT regarding stock options.

The next largest tax is social security. This tax is 6.2% of an employees' income paid by the employer, and 6.2% paid by the employee. Note that the employer always must budget in such a way that the 6.2% paid by the employer could have been paid to the employee, thus the effect of this tax is a second income tax of 12.4%. This tax is paid only on the employee's first $76,200 of income.

There is a medicare tax, 1.45% of the employee's income paid by the employer, and 1.45% by the employee. This is used to pay for medical care for qualifying persons, usually people over the age of 65.

Dividend and interest income is not subject to social security or medicare taxes.

The U.S. has an income tax to support unemployment insurance. This is 1.2% of the first $7,000, but coordinated with state unemployment agencies and taxes in such a way that most employees are not double taxed in states that have unemployment insurance.

The U.S. also has a tax to pay for retraining of displaced workers, but it is only 0.1% of the first $7,000 of income, and it is assessed only on employers.

Employers pay these taxes directly to federal banks, which use it to retire short-term treasury debt. For this reason, most employers maintain an account at a federal bank.

The U.S. also maintains federal excise taxes on gasoline, and other fuels used by vehicles. At this time, they are $0.183 per gallon for gasoline.

The government tracks tax payment by an account number and payment date. For the IRS, the account number is a social security number, or for corporations, partnerships or other synthetic persons, an employer ID number.

For more information, including tax and report calendars, information about forms, filing addresses and other information, see IRS Publication 15, circular E, "Employer's Tax Guide", available for free from http://www.irs.gov/forms_pubs/pubs.html

History

The first income tax only taxed the very very wealthy as it started with income over $30,000[? my memory is going- feel free to fix it] at a tax rate of 2 percent. $??? is $??? in 2000 dollars.

At first the income tax was incrementally expanded by the US Congress, and then inflatoin automatically raised most persons into tax brackets formerly reserved for the wealthy. Income tax and now applies to almost 2/3 of the population. The lowest earning workers ($20,000 in 2000) pay no income taxes as a group and actually get a small subsidy from the federal government because of child credits and the earned income credit. Notably however, lower income individuals pay a disproportionate share of payroll taxes for Social Security, Medicare, Unemployment Insurance, and the like. These payroll taxes can amount to 7-10% of every dollar and since they do not show up on tax forms their impact is less noticed.

The upper 25 percent of wage earners (incomes over $50,000 in 2000) pay most of the income tax.

Most states also tax. Typically there is a tax on land, and there may be additional income taxes, luxury, excise or sales taxes. Cities and counties may levy additional taxes, for instance to improve parks or schools. As in the case of the IRS, they generally require a tax payment account number.

Florida is one example of a state without an income tax. California has all the mentioned taxes, and can result in taxes that exceed 51% of income for many workers.

/Talk