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Taxation in the United States may involve payments to at least four different levels of government: local government (possibly including one or more of municipal, township, district and county governments), regional entities (school, utility and transit districts) state government, and the federal government. Local government is financed by value based property taxes (which may vary depending upon when the parcel was purchased or the manner of property transfer) while additional taxes may be in the form of fixed parcel taxs, fees (e.g. building permits, which may reflect the added capital cost and operating costs of services such as schools, parks, etc.), fines (particularly parking and traffic tickets), sometimes income tax, sometimes a gross receipts or gross payroll tax, and sometimes by a portion of sales taxes collected by the state, a tax which may vary among jurisdictions (particularly counties) within the state and which may exclude or include specific items or services, depending upon the state and for food, may be excluded, included for restaurants and possibly excluded for food not eaten at the serving location. In California, starter plants and trees obtained from a garden center are taxed if adjudged for decorative purposes while plants for food production are untaxed, as is food in this state.
States permit the creation of special assessment districts (typically for provision of water or removal of sewage, or for parks, public transit or schools) whose boundaries may be independent of other boundaries and whose income may be from one or more of service assessments, property taxes, parcel taxes, a portion of road or bridge tolls, or an additional increment upon sales taxes in addition to the non–tax fees for services provided (such as metered water). State government is financed mainly by a mix of sales and/or income taxes and to a lesser extent by corporate registration fees, certain excise taxes, and automobile license fees.
The federal government is now financed primarily by personal and corporate income taxes, with the original funding via tariffs upon imported goods now representing only a minor portion of federal income. There are also non–tax "fees" to recompense agencies for services or to fill specific trust funds such as that placed upon airline tickets for airport expansion and air traffic control. Often the receipts intended to be placed "trust" funds are used for other purposes, with the government posting an IOU ('I own you') in the form of a federal bond or other accounting instrument, then spending the money on unrelated current expenditures. Federal excise taxes are applied to specific items such as motor fuels, tires, telephone usage, tobacco products, alcoholic beverages, etc., often but not always allocated to special funds related to the object or activity taxed. Social security income taxes are taken from earned income (wages), but not from other sources of income (e.g. interest and dividends), and the amount of earned income subject to the tax is limited at the upper end with the social security taxes on low income earners ameliorated by an earned income tax credit, essentially a negative tax.
There is also "medicare" taxes, a system parallel to social security. The employer must make an equal contribution to these taxes. Self employed persons must pay both portions. There are also estate taxes, applicable mostly to wealthy families. Certain capital gains are taxed while others are not taxed or taxed above specific levels dependent upon various asset classes.
Most complexity in taxes at the federal level is due to numerous special exclusions of or specific tax rates for certain kinds of income, tax deductions and tax credits for specific expenditures, taxes to state and local jurisdictions, home mortgage interest but not other debt interest (e.g. credit card or automobile finance debt) such as would generally be useful to a lower income person, and an alternative minimum tax, which negates the effectiveness of most of these exclusions, deductions, and credits, particularly for middle income families with a large families and high mortgage debt who also reside in high tax states.
Depending upon the amount of additional income, Social Security payments may be untaxed or partially taxed, dependent upon the nature and level of other income. In some cases marginal tax rates combined with other benefit losses such as the provision of medical care for indigent persons may result in effective marginal taxation exceeding 100 percent, although these effects are usually seen at the lower end of the income range. Conversely, due to tax shelters and untaxed income such as that from municipal and state bonds, the taxation rates for the upper income ranges will generally decline well below that seen by middle income wage earners and for prosperous corporations may actually in effect be negative, largely due to accounting manipulations that take advantage of special interest loopholes in the tax laws.
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. The income tax is called a progressive tax because it takes a larger percentage of the income from higher income individuals. It is assessed on most corporations, as well, so that the dividends paid to stockholders are subject to a double tax. Federal payroll taxes in the United States are primarily collected by employers, for the U.S. Internal Revenue Service.
The U.S. government rewards certain behavior with tax deductions or tax credits. The most famous reduction in taxes is that income used to pay mortgage interest on a personal home is exempted from taxes, if the taxpayer elects to itemizeIndividual taxpayers in the United States are faced with a choice when preparing their tax returns. Starting with their AGI (adjusted gross income), they can itemize their deductions (from a list of allowable items) and subtract the total from their AGI (. Taxpayers who do not participate in an employer-sponsored pension plan may contribute up to $3,000 ($3,500 if age 50 or above) into an individual retirement account, and deduct that contribtion from their gross income. The Earned Income Tax Credit benefits low- to moderate-income working families.
There are two ways to calculate income tax. The regular way is based on the gross income minus any applicable deductions and then a marginal tax percentage is applied according to the taxpayer's income bracket. From this result, any applicable tax credits are subtracted and the result is the income tax owed. If the result is a negative number due to refundable tax creditRefundable tax credit refers to the concept of giving tax refunds to individuals in excess of the amount of tax actually paid. By making a tax credit refundable a government uses the tax system to redistribute wealth. Although some would argue this redists, the taxpayer is entitled to a tax refund even if no tax had been paid!
The second way, the Alternative Minimum TaxThe Alternative Minimum Tax AMT system exists as a parallel income tax system in the United States. The AMT system uses different rules for determining taxable income and allowable deductions, and uses a simple 26/28% rate calculation to determine the Ten (AMT) is based on the gross income plus any tax preference items such as paper gain on exercised stock optionA stock option is a specific type of option with a stock as the underlying instrument (the security that the value of the option is based on). Thus it is a contract to buy (known as a " call" contract) or sell (known as a " put" contract) shares of stock,s with no deduction from any tax shelter s. The lack of tax shelter and added unrealized income almost guarantee a much higher taxable income in the alternative calculation. This higher income base is multiplied by 24% or 28% depending on taxpayer income. The taxpayer pays the higher of the two computed tax liabilities. In the tax year 2000, many taxpayers in the Silicon Valley were caught unprepared by the AMT due to the sudden stock market crash. For example, if 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 a 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. In 2000 and 2001, people exercised stock options and held onto the shares, hoping to pay long-term capital gains taxes instead of short-term capital gains taxes. However, these people were forced to pay the AMT on this income, and by the end of the year, the stock was no longer worth the amount of AMT tax owed, forcing many individuals into bankruptcy. In the Nortel example given above, the individual would receive a credit for the AMT paid when the individual did eventually sell the Nortel shares.
Another flaw in the AMT is that it hasn't been changed at the same rate as "regular" income taxes. The tax cut passed in 2001 lowered regular tax rates, but did not lower AMT tax rates. As a result, certain middle-class people are affected by the AMT, even though that was not the original intention of the law. People with large deductions, particularly mortgage interest and state income tax deductions, are affected the most. The AMT also has the potential to trap families with large numbers of dependents (usually children), although in recent years, Congress has acted to keep deductions for dependents, especially children, from triggering the AMT.
IRS statistics for 2000 show that returns showing less than $15,000 in adjusted gross income amounted to 30 percent of total returns filed but accounted for less than 1 percent of tax paid. By contrast, although they made up only 2 percent of all taxpayers that year, taxpayers reporting $200,000 or more in adjusted gross income paid 45 percent of all federal income taxes.
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