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Decoding The American Tax System

As an American citizen, one of the things you have to navigate your way through is the rather complex tax system. Whether it is for the purpose of filing your own tax returns or for making informed decisions during presidential elections, understanding the American tax system is critical.

In this article, we will decode the entire system of taxes you need to understand as an American citizen. Here’s what we will discuss:

  1. Tax Authorities in America
  2. Types of Taxes in America
  3. What is Tax Liability?
  4. Tax Table
  5. How to Calculate Tax Liability
  6. Difference between Tax Evasion and Tax Avoidance

Now, we will examine each of these subtopics in detail.

Tax Authorities in America

In the United States, there are several different tax authorities to administer taxes. At the federal level, there are three main authorities administering the taxes. They are:

Internal Revenue Service (IRS)

The IRS is responsible for enforcing all the federal tax laws of the United States on domestic activities excluding the ones enforced by the Alcohol and Tobacco Tax and Trade Bureau (TTB). The service centers where tax returns are processed are also maintained by the IRS. The IRS provides taxpayer services and administers tax examinations through a National Office in Washington, DC, and its other local offices.

Alcohol and Tobacco Tax and Trade Bureau (TTB)

The Alcohol and Tobacco Tax and Trade Bureau, abbreviated as the TTB, is a division of the Department of Treasury that is responsible for enforcing federal excise tax laws that are related to firearms, tobacco, and alcohol.

Customs and Border Protection

The Customs and Border Protection is a unit of the Department of Homeland Security. It is the agency responsible for the collection of customs duties and regulation of international trade.

There is a myriad of taxes charged by the local and state governments as well, but for the purposes of this article, we will stick to the federal system of taxes only.

Types of Taxes in the U.S.

There are several types of taxes that you should be aware of as an American. Let’s take a quick look at them all.

Income Tax

Income tax is imposed by the federal government on the incomes of wage workers and freelancers as well as on the net income of business owners. Income tax brackets are progressive in most cases, hence the higher your income, the more tax you must pay.

Payroll Tax

Payroll taxes are subtracted from your monthly salary by employers as mandated by the federal government. These taxes are authorized by the Federal Insurance Contribution Act, and are commonly known as FICA taxes.

For self-employed people, the tax rate is 15.3%, while for others it’s 7.65%. The amount is divided as 1.45% for Medicare and 6.2% for the social security system of the nation.

Property Tax

Property taxes are imposed on the assessed value of personal property. If you rent an apartment, taxes like property and estate taxes are not for you to worry about. But if you are a homeowner, you are to pay property taxes on a recurring basis.

Estate Tax

If you leave behind an estate that is more than the standard limit, or if you give away property while in all your senses, the heir of the estate will have to pay estate taxes.

Capital Gains Tax

Capital gains taxes are charged on profits you make by selling your assets. While these taxes are usually applied to bond and stock transactions, any profits made from selling real estate can also be subjected to it.

Gift Tax

If you gift anything that is worth more than $15,000, you will have to pay a gift tax. This will free your heir from having to pay estate tax.

Hotel Tax

Hotel taxes are charged by most hotels in America on top of the regular room rate. Some hotels also impose additional taxes like city tax, occupancy tax, and luxury tax, which sometimes can add up to around 25% of the total billed amount.

Sales Tax

Sales taxes are a way used by the local and the state governments to raise revenue. This tax is imposed on any purchase of items that are made at the retail level. The tax rates vary depending on the type of item purchased and the jurisdiction of such a purchase.

Excise Tax

Excise taxes are imposed by the federal government not on the value of items but on their quantity. For example, the United States imposes a tax of 18.4 cents on each gallon of gas purchased, irrespective of the price the seller charged for it.

Sin Tax

Sin taxes are imposed on the purchase of items like alcohol and cigarettes.

Luxury Tax

As the name suggests, luxury taxes are imposed in the United States on items of luxury like jewelry and expensive cars, or on stays at luxurious hotels.

What is Tax Liability?

The IRS will softly imply and put it discreetly in a corner cubicle: you owe us money.

Tax Liability is the amount of taxes you have to pay in lieu of due notice to the IRS or your state respective state government. It is generally calculated and determined by your earnings and filing status after a few deductions and credits marginalization.

America has a progressive tax system with seven income tax brackets ranging from 10% to 37%. defining the rates at which singles and couples are taxed as they reach a certain threshold of income.

Tax Table

RateSingle Individuals – Taxable Income OverMarried Individuals Filing Joint Returns- Taxable Income OverHeads of Households – Taxable Income Over
10%$0$0$0
12%$9,875$19,750$14,100

 

22%$40,125$80,250$53,700
24%$85,525$171,050$85,500
32%$163,300$326,600$163,300
35%$207,350$414,700$207,350

 

37%$518,400$622,050$518,400

 

How to Calculate Tax Liability

Calculating your tax liability is not as difficult as it sounds. To calculate the amount of tax you have to pay in lieu of due notice to the IRS, you would first need to find out your gross tax liability by finding the difference of your taxable income and tax deductions.

After you have calculated the gross tax liability, the difference of the tax credits you are eligible for and your gross tax liability gives you your total income tax liability. In case you are not eligible for any tax credits, your gross tax liability is equal to your total income tax liability.

If you hate math and dread the tedious paperwork that comes with filing taxes, you can always seek help from the professionals. For example, Tax Group Center and Visor offer services to help you navigate the latest changes in tax systems and file your taxes. But if your concerns are primarily about getting extensions, you can go over to TaxExtension. It is an IRS-certified portal that can guide you through the process of filing for extensions on your taxes.

Tax Evasion vs. Tax Avoidance

Everybody likes to skip taxes, but paying your tax is a moral and legal obligation and duty for having the privileges of a prosperous citizen. The term tax avoidance or tax evasion is often misconstrued in their usage when it comes to taxation acronyms and terminologies, but as inarguably put, they are completely contrasting concepts.

Tax avoidance is a more legitimate way of reducing the taxes you pay and increasing the income after tax using means that are considered legal and viable in the tax code. Tax evasion on the other is using illegal and criminal minded ways to evade tax filings for excess unaccounted wealth and property assets. Usually, through falsification or misinterpreting the actual income.

To expand our understanding of this, let’s take a look at some examples of tax evasion. In general, it’s considered tax evasion if your intention is to keep your untaxed money hidden with the motive of not paying tax on it, ever. Some classic examples are:

  • Under-reporting an income by hiding what you actually earn
  • Negligence in reporting an income source
  • Submitting inaccurate business income and expenses in IRS audits
  • Making a conscious attempt to underpay your taxes
  • Falsifying the amount of deductions to generate more income
  • Making two sets of accounting books
  • Tampering in accounting books and records to suit your business income needs
  • Claiming your personal expenditures as a part of your business expense
  • Transferring your business assets or income to undisclosed sources

Tax evasion in America is a serious offense. Any individual or corporate, regardless of the stature of their identity, who intentionally attempts to evade or in any way defeat tax whatsoever will be convicted of a federal felony and fined up to $500,000 in the case of a corporation or in serious cases imprisoned for not more than 5 years. Sometimes, the penalty can include both these punishments.

Conclusion

It is usually advised to know the tax laws of the country and get a tax professional to assess your tax-related dilemmas to avoid jeopardizing your career and of course, imprisonment.

Though the American tax system appears a bit complicated and includes many different types of taxes and tax authorities, it is not too tough a nut to crack. Hope this article clears the tax clouds in your mind and helps you make important tax-related decisions like filing your own tax returns.