Both federal and state income taxes are generally imposed** in the same way in the United States. \u00a0There are some states though (for example New Hampshire) that don’t impose any state income taxes. \u00a0For the purpose of this post I will just focus on federal income taxes, but keep in mind that most people are paying both federal and state income taxes at about the same rates.<\/p>\n
The income that is taxed by the United States government is determined by a number of tax rules, for example most business expenses (i.e. money spent to run a business) reduce taxable income. \u00a0Individual people are also allowed to reduce their taxable income with personal allowances*** by deducting money they have paid in home mortgage interest, charitable contributions, medical expenses, etc. \u00a0The federal tax rates on overall income varies from 15% – 35% of all of one’s income (after a person has made allowed deductions).<\/p>\n
So, for example, if you live in the United States and you make $40,000 a year; this is your income and this is what you will be taxed on every April 15th. \u00a0Before you pay income taxes on this amount though, you may have a number of deductions or allowances you can use to reduce this amount, for example: charitable continuations, or mortgage interest payments, or college tuition payments.\u00a0 So, for example, after all your deductions and allowances you may reduce your taxable income to $34,000. \u00a0Then you will be taxed by the government at a certain percentage (somewhere between 15-35%, usually the more you make the higher the rate you are taxed at). \u00a0If you are taxed at 15% on the $34,000 you have of taxable income you will have to pay the United States government $5,100 on April 15th. \u00a0That is a lot of money for most people to have to pay all at once! \u00a0Luckily most people don’t have to pay all of this money at one time. \u00a0Most employers in the United States estimate how much their employees will have to pay in income taxes each year and take a percentage of this money out of each paycheck a person receives throughout the year.\u00a0 Then on April 15th, if you and your employer have estimated your income tax correctly throughout the year, you may not have to pay anything at all because you are all paid up, or you might just have to pay a little bit, or (if you are lucky) you might get a refund from the government because you have over paid your income tax amount throughout the year.\u00a0 Everyone has to file a federal tax return form if they worked during the previous year, regardless of whether a person has to pay additional taxes, if they will get a refund, or if the person doesn’t owe taxes nor will they receive a refund with the federal government. \u00a0It is by completing this income tax form that people find out if they have paid the right amount, too little, or too much to the government and if they now own more money or will be getting money back. \u00a0It is always nice to get money back!\u00a0 That is a brief overview of how the income tax system works in the United States, if it seems complicated to you, you are not alone, it seems complicated to many of us Americans too.<\/p>\n
(Not so) Happy Tax Day everyone!<\/p>\n
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