The United States of America is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.
Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax rules, not accounting principles, and includes almost all income from whatever source. Most business expenses reduce taxable income, though limits apply to a few expenses.
Individuals are permitted to reduce taxable income by personal allowances and certain nonbusiness expenses, including home mortgage interest, state and local taxes, charitable contributions, and medical and certain other expenses incurred above certain percentages of income. State rules for determining taxable income often differ from federal rules. Federal tax rates vary from 15% to 35% of taxable income. State and local tax rates vary by jurisdiction, and many are graduated. State taxes are generally treated as a deductible expense for federal tax computation. Certain alternative taxes may apply.
Payroll taxes are imposed by the federal and all state governments. These include Social Security and Medicare taxes imposed on both employers and employees, at a combined rate of 15.3% (13.3% for 2011). Social Security tax applies only to the first $106,800 of wages in 2009 through 2011. Employers also must withhold income taxes on wages. An unemployment tax and certain other levies apply.
Property taxes are imposed by most local governments and many special purpose authorities based on the fair market value of property. School and other authorities are often separately governed, and impose separate taxes. Property tax is generally imposed only on realty, though some jurisdictions tax some forms of business property. Property tax rules and rates vary widely.
Sales taxes are imposed on the price at retail sale of many goods and some services by most states and some localities. Sales tax rates vary widely among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed. Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
The United States imposes tariffs or customs duties on the import of many types of goods from many jurisdictions. This tax must be paid before the goods can be legally imported. Rates of duty vary from 0% to more than 20%, based on the particular goods and country of origin.
The total tax revenue as a percentage of
GDP for the U.S. over the past several decades compared to other first world nations.
The United States has an assortment of federal, state, local, and special purpose governmental jurisdictions. Each imposes taxes to fully or partly fund its operations. These taxes may be imposed on the same income, property or activity, often without offset of one tax against another.
The types of tax imposed at each level of government vary, in part due to constitutional restrictions. Income taxes are imposed at the federal and most state levels. Taxes on property are typically imposed only at the local level, though there may be multiple local jurisdictions that tax the same property. Excise taxes are imposed by the federal and some state governments. Sales taxes are imposed by most states and many local governments. Customs duties or tariffs are only imposed by the federal government. A wide variety of other taxes, some called user or license fees, are imposed.
Federal government receipts by source, 2010.
[1]
Taxes may be imposed on individuals (natural persons), business entities, estates, trusts, or other forms of organization. Taxes may be based on property, income, transactions, importation of goods, business activity, or a variety of factors, and are generally imposed on the type of taxpayer for whom such tax base is relevant. Thus, property taxes tend to be imposed on property owners. In addition, certain taxes, particularly income taxes, may be imposed on the members of organizations for the organization's activities. Thus, partners are taxed on the income of their partnership.
With few exceptions, one level of government does not impose tax on another level of government or its instrumentalities.
Taxes based on income are imposed at the federal, most state, and some local levels within the United States. The tax systems within each jurisdiction may define taxable income separately. Many states refer to some extent to federal concepts for determining taxable income.
The U.S. income tax system imposes a tax based on income on individuals, corporations, estates, and trusts.[2] The tax is taxable income, as defined, times a specified tax rate. This tax may be reduced by credits, some of which may be refunded if they exceed the tax calculated. Taxable income may differ from income for other purposes (such as for financial reporting). The definition of taxable income for federal purposes is used by many, but far from all states. Income and deductions are recognized under tax rules, and there are variations within the rules among the states. Book and tax income may differ.
Under the U.S. system, individuals, corporations, estates, and trusts are subject to income tax. Partnerships are not taxed; rather, their partners are subject to income tax on their shares of income and deductions, and take their shares of credits. Some types of business entities may elect to be treated as corporations or as partnerships.
Total tax revenue (not adjusted for inflation) for the U.S. federal government from 1980 to 2009 compared to the amount of revenue coming from individual income taxes.
Taxpayers are required to file tax returns and self assess tax. Tax may be withheld from payments of income (e.g., withholding of tax from wages). To the extent taxes are not covered by withholdings, taxpayers must make estimated tax payments, generally quarterly. Tax returns are subject to review and adjustment by taxing authorities, though far less than all returns are reviewed.
Taxable income is gross income less exemptions, deductions, and personal exemptions. Gross income includes "all income from whatever source". Certain income, however, is subject to tax exemption at the federal and/or state levels. This income is reduced by tax deductions including most business and some nonbusiness expenses. Individuals are also allowed a deduction for personal exemptions, a fixed dollar allowance. The allowance of some nonbusiness deductions is phased out at higher income levels.
The U.S. federal and most state income tax systems tax the worldwide income of residents.[3] A federal foreign tax credit is granted for foreign income taxes. Individuals may also claim the foreign earned income exclusion. Individuals may be a citizen or resident of the United States but not a resident of a state. Many states grant a similar credit for taxes paid to other states. These credits are generally limited to the amount of tax on income from foreign (or other state) sources.
Federal and state income tax is calculated, and returns filed, for each taxpayer. Two married individuals may calculate tax and file returns jointly or separately. In addition, unmarried individuals supporting children or certain other relatives may file a return as a head of household. Parent-subsidiary groups of companies may elect to file a consolidated return.
Historical
marginal tax rates for the lowest and highest income earners in the United States. Source: U.S. Bureau of the Public Debt.
Income tax rates differ at the federal and state levels for corporations and individuals. Federal and many state income tax rates are higher (graduated) at higher levels of income. The income level at which various tax rates apply for individuals varies by filing status. The income level at which each rate starts generally is higher (i.e., tax is lower) for married couples filing a joint return or single individuals filing as head of household.
Individuals are subject to federal graduated tax rates from 10% to 35%.[4] Corporations are subject to federal graduated rates of tax from 15% to 35%; a rate of 34% applies to income from $335,000 to $15,000,000.[5] State income tax rates vary from 1% to 16%, including local income tax where applicable. State and local taxes are generally deductible in computing federal taxable income. Federal and many state individual income tax rate schedules differ based on the individual's filing status.
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Gross incomeTaxable income is gross income [6] less adjustments and allowable tax deductions.[7] Gross income for federal and most states is receipts and gains from all sources less cost of goods sold. Gross income includes "all income from whatever source," and is not limited to cash received.
The amount of income recognized is generally the value received or which the taxpayer has a right to receive. Certain types of income are specifically excluded from gross income. The time at which gross income becomes taxable is determined under federal tax rules. This may differ in some cases from accounting rules.[8]
Certain types of income are excluded from gross income (and therefore subject to tax exemption).[9] The exclusions differ at federal and state levels. For federal income tax, interest income on state and local bonds is exempt, while few states exempt any interest income except from municipalities within that state. In addition, certain types of receipts, such as gifts and inheritances, and certain types of benefits, such as employer provided health insurance, are excluded from income.
Foreign persons are taxed only on income from U.S. sources or from a U.S. business. Tax on foreign persons on non-business income is at 30% of the gross income, but reduced under many tax treaties.
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Tax deductionThe U.S. system allows reduction of taxable income for both business[10] and some nonbusiness[11] expenditures, called deductions. Businesses selling goods reduce gross income directly by the cost of goods sold. In addition, businesses may deduct most types of expenses incurred in the business. Some of these deductions are subject to limitations. For example, only 50% of the amount incurred for any meals or entertainment may be deducted.[12] The amount and timing of deductions for business expenses is determined under the taxpayer's tax accounting method, which may differ from methods used in accounting records.[13]
Some types of business expenses are deductible over a period of years rather than when incurred. These include the cost of long lived assets such as buildings and equipment. The cost of such assets is recovered through deductions for depreciation or amortization.
In addition to business expenses, individuals may reduce income by an allowance for personal exemptions [14] and either a fixed standard deduction or itemized deductions.[15] One personal exemption is allowed per taxpayer, and additional such deductions are allowed for each child or certain other individuals supported by the taxpayer. The standard deduction amount varies by taxpayer filing status. Itemized deductions by individuals include home mortgage interest, property taxes, certain other taxes, contributions to recognized charities, medical expenses in excess of 7.5% of adjusted gross income, and certain other amounts.
Personal exemptions, the standard deduction, and itemized deductions are limited (phased out) above certain income levels.[16]
Corporations must pay tax on their taxable income independently of their shareholders.[17] Shareholders are also subject to tax on dividends received from corporations.[18] By contrast, partnerships are not subject to income tax, but their partners calculate their taxes by including their shares of partnership items.[19] Corporations owned entirely by U.S. citizens or residents (S corporations) may elect to be treated similarly to partnerships. A Limited Liability Company and certain other business entities may elect to be treated as corporations or as partnerships.[20] States generally follow such characterization. Many states also allow corporations to elect S corporation status. Charitable organizations are subject to tax on business income.[21]
Certain transactions of business entities are not subject to tax. These include many types of formation or reorganization.[22]
A wide variety of tax credits may reduce income tax at the Federal[23] and state levels. Some credits are available only to individuals, such as the child tax credit for each dependent child or the Earned Income Tax Credit for low income wage earners. Some credits, such as the Work Opportunity Tax Credit, are available to businesses, including various special industry incentives. A few credits, such as the foreign tax credit, are available to all types of taxpayers.
The United States Federal and state income tax systems are self assessment systems. Taxpayers must declare and pay tax without assessment by the taxing authority. Quarterly payments of tax estimated to be due are required to the extent taxes are not paid through withholdings.[24] Employers must withhold income tax, as well as Social Security and Medicare taxes, from wages.[25] Amounts to be withheld are computed by employers based on representations of tax status by employees on Form W-4, with limited government review.[26]
43 states and many localities in the United States impose an income tax on individuals. 47 states and many localities impose a tax on the income of corporations. Tax rates vary by state and locality, and may be fixed or graduated. Most rates are the same for all types of income. State and local income taxes are imposed in addition to Federal income tax. State income tax is allowed as a deduction in computing Federal income tax, subject to limitations for individuals.
State and local taxable income is determined under state law, and often is based on Federal taxable income. Most states conform to many Federal concepts and definitions, including defining income and business deductions and timing thereof.[27] State rules vary widely with regard to individual itemized deductions. Most states do not allow a deduction for state income taxes for individuals or corporations, and impose tax on certain types of income exempt at the Federal level.
Some states have alternative measures of taxable income, or alternative taxes, especially for corporations.
States imposing an income tax generally tax all income of corporations organized in the state and individuals residing in the state. Taxpayers from another state are subject to tax only on income earned in the state or apportioned to the state. Businesses are subject to income tax in a state only if they have sufficient nexus in (connection to) the state.
Individuals and corporations not resident in the United States are subject to Federal income tax only on income from a U.S. business and certain types of income from U.S. sources.[28] States tax individuals resident outside the state and corporations organized outside the state only on wages or business income within the state. Payers of some types of income to nonresidents must withhold Federal or state income tax on the payment. Federal withholding of 30% on such income may be reduced under a tax treaty. Such treaties do not apply to state taxes.
An Alternative Minimum Tax (AMT) is imposed at the Federal level on a somewhat modified version of taxable income.[29] The tax applies to individuals and corporations. The tax base is adjusted gross income reduced by a fixed deduction that varies by taxpayer filing status. Itemized deductions of individuals are limited to home mortgage interest, charitable contributions, and a portion of medical expenses. AMT is imposed at a rate of 26% or 28% for individuals and 20% for corporations, less the amount of regular tax. A credit against future regular income tax is allowed for such excess, with certain restrictions.
Many states impose minimum income taxes on corporations and/or a tax computed on an alternative tax base. These include taxes based on capital of corporations and alternative measures of income for individuals. Details vary widely by state.
In the United States, taxable income is computed under rules that differ materially from U.S. generally accepted accounting principles. Since only publicly traded companies are required to prepare financial statements, many non-public companies opt to keep their financial records under tax rules. Corporations that present financial statements using other than tax rules must include a detailed reconciliation of their financial statement income to their taxable income as part of their tax returns. Key areas of difference include depreciation and amortization, timing of recognition of income or deductions, assumptions for cost of goods sold, and certain items (such as meals and entertainment) the tax deduction for which is limited.
Income taxes in the United States are self assessed by taxpayers [30] by filing required tax returns.[31] Taxpayers, as well as certain non taxpaying entities like partnerships, must file annual tax returns at the Federal and applicable state levels. These returns disclose a complete computation of taxable income under tax principles. Taxpayers compute all income, deductions, and credits themselves, and determine the amount of tax due after applying required prepayments and taxes withheld. Federal and state tax authorities provide preprinted forms that must be used to file tax returns. IRS Form 1040 series of forms is required for individuals, and Form 1120 series of forms for corporations, and Form 1065 for partnerships.
The state forms vary widely, and rarely correspond to Federal forms. Tax returns vary from the two page (Form 1040EZ) used by nearly 70% of individual filers to thousands of pages of forms and attachments for large entities. Groups of corporations may elect to file consolidated returns at the Federal level and with a few states. Electronic filing of Federal and many state returns is widely encouraged and in some cases required, and many vendors offer computer software for use by taxpayers and paid return preparers to prepare and electronically file returns.
In the United States, payroll taxes are assessed by the federal government, all fifty states, the District of Columbia, and numerous cities. These taxes are imposed on employers and employees and on various compensation bases. They are collected and paid to the taxing jurisdiction by the employers. Most jurisdictions imposing payroll taxes require reporting quarterly and annually in most cases, and electronic reporting is generally required for all but small employers.[32]
Federal, state, and local withholding taxes are required in those jurisdictions imposing an income tax. Employers having contact with the jurisdiction must withhold the tax from wages paid to their employees in those jurisdictions.[33] Computation of the amount of tax to withhold is performed by the employer based on representations by the employee regarding his/her tax status on IRS Form W-4.[34] Amounts of income tax so withheld must be paid to the taxing jurisdiction, and are available as refundable tax credits to the employees. Income taxes withheld from payroll are not final taxes, merely prepayments. Employees must still file income tax returns and self assess tax, claiming amounts withheld as payments.[35]
Federal social insurance taxes are imposed equally on employers[36] and employees,[37] consisting of a tax of 6.2% of wages up to an annual wage maximum ($106,800 in 2010) for Social Security plus a tax of 1.45% of total wages for Medicare.[38] For 2011, the employee's contribution was reduced to 4.2%, while the employer's portion remained at 6.2%.[39] To the extent an employee's portion of the 6.2% tax exceeds the maximum by reason of multiple employers, the employee is entitled to a refundable tax credit upon filing an income tax return for the year.[40]
Employers are subject to unemployment taxes by the federal[41] and all state governments. The tax is a percentage of taxable wages[42] with a cap. The tax rate and cap vary by jurisdiction and by employer's industry and experience rating. For 2009, the typical maximum tax per employee was under $1,000.[43] Some states also impose unemployment, disability insurance, or similar taxes on employees.[44]
Employers must report payroll taxes to the appropriate taxing jurisdiction in the manner each jurisdiction provides. Quarterly reporting of aggregate income tax withholding and Social Security taxes is required in most jurisdictions.[45] Employers must file reports of aggregate unemployment tax quarterly and annually with each applicable state, and annually at the Federal level.[46]
Each employer is required to provide each employee an annual report on IRS Form W-2[47] of wages paid and Federal, state and local taxes withheld, with a copy must to the IRS and many states. These are due by January 31 and February 28 (March 31 if filed electronically), respectively, following the calendar year in which wages are paid. The Form W-2 constitutes proof of payment of tax for the employee.[48]
Employers are required to pay payroll taxes to the taxing jurisdiction under varying rules, in many cases within 1 banking day. Payment of Federal and many state payroll taxes is required to be made by electronic funds transfer if certain dollar thresholds are met, or by deposit with a bank for the benefit of the taxing jurisdiction.[49]
Failure to timely and properly pay federal payroll taxes results in an automatic penalty of 2% to 10%.[50] Similar state and local penalties apply. Failure to properly file monthly or quarterly returns may result in additional penalties. Failure to file Forms W-2 results in an automatic penalty of up to $50 per form not timely filed.[51] State and local penalties vary by jurisdiction.
A particularly severe penalty applies where federal income tax withholding and Social Security taxes are not paid to the IRS. The penalty of up to 100% of the amount not paid can be assessed against the employer entity as well as any person (such as a corporate officer) having control or custody of the funds from which payment should have been made.[52]
There is no Federal sales or use tax in the United States. All but five states impose sales and use taxes on retail sale, lease and rental of many goods, as well as some services. Many cities, counties, transit authorities and special purpose districts impose an additional local sales or use tax. Sales and use tax is calculated as the purchase price times the appropriate tax rate. Tax rates vary widely by jurisdiction from less than 1% to over 10%. Sales tax is collected by the seller at the time of sale. Use tax is self assessed by a buyer who has not paid sales tax on a taxable purchase.
Unlike value added tax, sales tax is imposed only once, at the retail level, on any particular goods. Nearly all jurisdictions provide numerous categories of goods and services that are exempt from sales tax, or taxed at a reduced rate. Purchase of goods for further manufacture or for resale is uniformly exempt from sales tax. Most jurisdictions exempt food sold in grocery stores, prescription medications, and many agricultural supplies. Generally cash discounts, including coupons, are not included in the price used in computing tax.
Sales taxes, including those imposed by local governments, are generally administered at the state level. States imposing sales tax require retail sellers to register with the state, collect tax from customers, file returns, and remit the tax to the state. Procedural rules vary widely. Sellers generally must collect tax from in-state purchasers unless the purchaser provides an exemption certificate. Most states allow or require electronic remittance of tax to the state. States are prohibited from requiring out of state sellers to collect tax unless the seller has some minimal connection with the state.[53]
Excise taxes may be imposed on the sales price of goods or on a per unit or other basis. Excise tax may be required to be paid by the manufacturer at wholesale sale, or may be collected from the customer at retail sale. Excise taxes are imposed at the Federal and state levels on a variety of goods, including alcohol, tobacco, tires, gasoline, diesel fuel, coal, firearms, telephone service, air transportation, unregistered bonds, and many other goods and services. Some jurisdictions require that tax stamps be affixed to goods to demonstrate payment of the tax.
Most jurisdictions below the state level in the United States impose a tax on interests in real property (land, buildings, and permanent improvements). Some jurisdictions also tax some types of business personal property.[54] Rules vary widely by jurisdiction.[55] Many overlapping jurisdictions (counties, cities, school districts) may have authority to tax the same property.[56] Few states impose a tax on the value of property.
Property tax is based on fair market value of the subject property. The amount of tax is determined annually based on the market value of each property on a particular date,[57] and most jurisdictions require redeterminations of value periodically. The tax is computed as the determined market value times an assessment ratio times the tax rate.[58] Assessment ratios and tax rates vary widely among jurisdictions, and may vary by type of property within a jurisdiction.[59] Where a property has recently been sold between unrelated sellers, such sale establishes fair market value. In other (i.e., most) cases, the value must be estimated. Common estimation techniques include comparable sales, depreciated cost, and an income approach. Property owners may also declare a value, which is subject to change by the tax assessor.
Property taxes are most commonly applied to real estate and business property. Real property generally includes all interests considered under that state's law to be ownership interests in land, buildings, and improvements. Ownership interests include ownership of title as well as certain other rights to property. Automobile and boat registration fees are a subset of this tax. Usually, other nonbusiness goods are not subject to property tax.
The assessment process varies by state, and sometimes within a state. Each taxing jurisdiction determines values of property within the jurisdiction and then determines the amount of tax to assess based on the value of the property. Tax assessors for taxing jurisdictions are generally responsible for determining property values. The determination of values and calculation of tax is generally performed by an official referred to as a tax assessor. Property owners have rights in each jurisdiction to declare or contest the value so determined. Property values generally must be coordinated among jurisdictions, and such coordination is often performed by a board of equalization.
Once value is determined, the assessor typically notifies the last known property owner of the value determination. After values are settled, property tax bills or notices are sent to property owners.[60] Payment times and terms vary widely. If a property owner fails to pay the tax, the taxing jurisdiction has various remedies for collection, in many cases including seizure and sale of the property. Property taxes constitute a lien on the property to which transferes are also subject. Mortgage companies often collect taxes from property owners and remit them on behalf of the owner.
The United States imposes tariffs or customs duties on imports of goods. The duty is levied at the time of import and is paid by the importer of record. Customs duties vary by country of origin and product. Goods from many countries are exempt from duty under various trade agreements. Certain types of goods are exempt from duty regardless of source. Customs rules differ from other import restrictions. Failure to properly comply with customs rules can result in seizure of goods and criminal penalties against involved parties. United States Customs and Border Protection (“CBP”) enforces customs rules.
Goods may be imported to the United States subject to import restrictions. Importers of goods may be subject to tax (“customs duty” or “tariff”) on the imported value of the goods. “Imported goods are not legally entered until after the shipment has arrived within the port of entry, delivery of the merchandise has been authorized by CBP, and estimated duties have been paid.”[61] Importation and declaration and payment of customs duties is done by the importer of record, which may be the owner of the goods, the purchaser, or a licensed customs broker. Goods may be stored in a bonded warehouse or a Foreign-Trade Zone in the United States for up to five years without payment of duties. Goods must be declared for entry into the U.S. within 15 days of arrival or prior to leaving a bonded warehouse or foreign trade zone. Many importers participate in a voluntary self assessment program with CBP. Special rules apply to goods imported by mail.
All goods imported into the United States are subject to inspection by CBP.
Some goods may be temporarily imported to the United States under a system similar to the ATA Carnet system. Examples include laptop computers used by persons traveling in the U.S. and samples used by salesmen.
Rates of tax on transaction values vary by country of origin. Goods must be individually labeled to indicate country of origin, with exceptions for specific types of goods. Goods are considered to originate in the country with the highest rate of duties for the particular goods unless the goods meet certain minimum content requirements. Extensive modifications to normal duties and classifications apply to goods originating in Canada or Mexico under the North American Free Trade Agreement.
All goods that are not exempt are subject to duty computed according to the Harmonized Tariff Schedule published by CBP and the U.S. International Trade Commission. This lengthy schedule[62] provides rates of duty for each class of goods. Most goods are classified based on the nature of the goods, though some classifications are based on use.
Customs duty rates may be expressed as a percentage of value or dollars and cents per unit. Rates based on value vary from zero to 20% in the 2011 schedule.[63] Rates may be based on relevant units for the particular type of goods (per ton, per kilogram, per square meter, etc.). Some duties are based in part on value and in part on quantity.
Where goods subject to different rates of duty are commingled, the entire shipment may be taxed at the highest applicable duty rate.[64]
Imported goods are generally accompanied by a bill of lading or air waybill describing the goods. For purposes of customs duty assessment, they must also be accompanied by an invoice documenting the transaction value. The goods on the bill of lading and invoice are classified and duty is computed by the importer or CBP. The amount of this duty is payable immediately, and must be paid before the goods can be imported. Most assessments of goods are now done by the importer and documentation filed with CBP electronically.
After duties have been paid, CBP approves the goods for import. They can then be removed from the port of entry, bonded warehouse, or Free-Trade Zone.
After duty has been paid on particular goods, the importer can seek a refund of duties if the goods are exported without substantial modification. The process of claiming a refund is known as duty drawback.
Certain civil penalties apply for failures to follow CBP rules and pay duty. Goods of persons subject to such penalties may be seized and sold by CBP. In addition, criminal penalties may apply for certain offenses. Criminal penalties may be as high as twice the value of the goods plus twenty years in jail.
Foreign-trade Zones are secure areas physically in the United States but legally outside the customs territory of the United States. Such zones are generally near ports of entry. They may be within the warehouse of an importer. Such zones are limited in scope and operation based on approval of the Foreign-Trade Zones Board. Goods in a Foreign-Trade Zone are not considered imported to the United States until they leave the Zone. Foreign goods may be used to manufacture other goods within the zone for export without payment of customs duties.[65]
Estate and gift taxes in the United States are imposed by the Federal and most state governments.[66] The estate tax is an excise tax levied on the right to pass property at death. It is imposed on the estate, not the beneficiary. Some states impose an inheritance tax on recipients of bequests. Gift taxes are levied on the giver (donor) of property where the property is transferred for less than adequate consideration. An additional generation-skipping transfer (GST) tax is imposed by the Federal and some state governments on transfers to grandchildren (or their descendants).
The Federal gift tax is computed based on cumulative taxable gifts, and is reduced by prior gift taxes paid. The Federal estate tax is computed on the sum of taxable estate and taxable gifts, and is reduced by prior gift taxes paid. These taxes are computed as the taxable amount times a graduated tax rate (up to 35% in 2011). The estate and gift taxes are also reduced by a "unified credit" equivalent to an exclusion ($5 million in 2011). Rates and exclusions have varied, and the benefits of lower rates and the credit have been phased out during some years.
Taxable gifts are certain gifts of U.S. property by nonresidents, most gifts of any property by residents, in excess of an annual exclusion ($13,000 for gifts made in 2011) per donor per donee. Taxable estates are certain U.S. property of nonresident decedents, and most property of residents. Residence for estate tax purposes is primarily based on domicile. U.S. real estate and most tangible property in the U.S. are subject to estate and gift tax whether the decedent or donor is resident or nonresident.
The taxable amount of a gift is the fair market value of the property in excess of consideration received at the date of gift. The taxable amount of an estate is the gross fair market value of all rights considered property at the date of death (or an alternative valuation date) ("gross estate"), less liabilities of the decedent, costs of administration (including funeral expenses) and certain other deductions. State estate taxes are deductible, with limitations, in computing the Federal taxable estate. Bequests to charities reduce the taxable estate.
Gift tax applies to all irrevocable transfers of interests in tangible or intangible property. Estate tax applies to all property owned in whole or in part by a citizen or resident at the time of his or her death, to the extent of the interest in the property. Generally, all types of property are subject to estate tax.[67] Whether a decedent has sufficient interest in property for the property to be subject to gift or estate tax is determined under applicable state property laws. Certain interests in property that lapse at death (such as life insurance) are included in the taxable estate.
Taxable values of estates and gifts are the fair market value. For some assets, such as widely traded stocks and bonds, the value may be determined by market listings. The value of other property may be determined by appraisals, which are subject to potential contest by the taxing authority. Special use valuation applies to farms and closely held businesses, subject to limited dollar amount and other conditions. Monetary assets, such as cash, mortgages, and notes, are valued at the face amount, unless another value is clearly established.
Life insurance proceeds are included in the gross estate. The value of a right of a beneficiary of an estate to receive an annuity is included in the gross estate. Certain transfers during lifetime may be included in the gross estate. Certain powers of a decedent to control the disposition of property by another are included in the gross estate.
The taxable estate of a married decedent is reduced by a deduction for all property passing to the decedent's spouse. Certain terminable interests are included. Other conditions may apply.
Donors of gifts in excess of the annual exclusion must file gift tax returns on IRS Form 709 and pay the tax. Executors of estates with a gross value in excess of the unified credit must file an estate tax return on IRS Form 706 and pay the tax from the estate. Returns are required if the gifts or gross estate exceed the exclusions. Each state has its own forms and filing requirements. Tax authorities may examine and adjust gift and estate tax returns.
Many jurisdictions within the United States impose taxes or fees on the privilege of carrying on a particular business or maintaining a particular professional certification. These licensing or occupational taxes may be a fixed dollar amount per year for the licensee, an amount based on the number of practitioners in the firm, a percentage of revenue, or any of several other bases. Persons providing professional or personal services are often subject to such fees. Common examples include accountants, attorneys, barbers, casinos, dentists, doctors, auto mechanics, plumbers, and stock brokers. In addition to the tax, other requirements may be imposed for licensure.
All 50 states impose vehicle license fee. Generally, the fees are based on type and size of vehicle and are imposed annually or biannually. All states and the District of Columbia also impose a fee for a driver's license, which generally must be renewed with payment of fee every few years.
Fees are often imposed by governments for use of certain facilities or services. Such fees are generally imposed at the time of use. Multi-use permits may be available. For example, fees are imposed for use of national or state parks, rulings from the Internal Revenue Service, use of certain highways (called "tolls" or toll roads), parking on public streets, and use of public transit.
Taxes in the United States are administered by literally hundreds of tax authorities. At the Federal level there are three tax administrations. Alcohol, tobacco, and firearms taxes are administered by the Alcohol and Tobacco Tax and Trade Bureau (TTB). All other taxes on domestic activities are administered by the Internal Revenue Service (IRS). Taxes on imports (customs duties) are administered by U.S. Customs and Border Patrol. TTB is part of the Department of Justice and CBP belongs to the Department of Homeland Security.[68]
The IRS is a division within the U.S. Department of Treasury. Organization of state and local tax administrations varies widely. Every state maintains a tax administration. A few states administer some local taxes in whole or part. Most localities also maintain a tax administration or share one with neighboring localities.
The IRS administers all U.S. Federal taxation on domestic activities, except those taxes administered by TTB. IRS functions include:
- Processing Federal tax returns (except TTB returns), including those for Social Security and other Federal payroll taxes
- Providing assistance to taxpayers in completing tax returns
- Collecting all taxes due related to such returns
- Enforcement of tax laws through examination of returns and assessment of penalties
- Providing an appeals mechanism for Federal tax disputes
- Referring matters to the Justice Department for prosecution
- Publishing information about U.S. Federal taxes, including forms, publications, and other materials
- Providing written guidance in the form of rulings binding on the IRS for the public and for particular taxpayers
The IRS maintains several Service Centers at which tax returns are processed. Taxpayers generally file most types of tax returns by mail with these Service Centers or file electronically. The IRS also maintains a National Office in Washington, DC, and numerous local offices providing taxpayer services and administering tax examinations.
Tax returns filed with the IRS are subject to examination and adjustment, commonly called an IRS audit. Only a small percentage of returns (about 1% of individual returns in IRS FY 2008) are examined each year. The selection of returns uses a variety of methods based on IRS experiences. On examination, the IRS may request additional information from the taxpayer by mail, in person at IRS local offices, or at the business location of the taxpayer. The taxpayer is entitled to representation by an attorney, CPA, or enrolled agent, at the expense of the taxpayer, who may make representations to the IRS on behalf of the taxpayer.
Taxpayers have certain rights in an audit. Upon conclusion of the audit, the IRS may accept the tax return as filed or propose adjustments to the return. The IRS may also assess penalties and interest. Generally, adjustments must be proposed within three years of the due date of the tax return. Certain circumstances extend this time limit, including substantial understatement of income and fraud. The taxpayer and the IRS may agree to allow the IRS additional time to conclude an audit. If the IRS proposes adjustments, the taxpayer may agree to the adjustment, appeal within the IRS, or seek judicial determination of the tax.
In addition to enforcing tax laws, the IRS provides formal and informal guidance to taxpayers. While often referred to as IRS Regulations, the regulations under the Internal Revenue Code are issued by the Department of Treasury. IRS guidance consists of:
The Alcohol and Tobacco Tax Trade Bureau (TTB), a division of the Department of the Treasury, enforces Federal excise tax laws related to alcohol, tobacco, and firearms. TTB is organized as six divisions, each with discrete functions:
- Revenue Center: processes tax returns and issues permits, and related activities;
- Risk Management: internally develops guidelines and monitors programs;
- Tax Audit: verifies filing and payment of taxes;
- Trade Investigations: investigating arm for non-tobacco items; and
- Tobacco Enforcement Division: enforcement actions for tobacco; and
- Advertising, Labeling and Formulation Division: implements various labeling and ingredient monitoring.
Criminal enforcement related to TTB is done by the Bureau of Alcohol, Tobacco, Firearms, and Explosives, a division of the Justice Department.
U.S. Customs and Border Protection (CBP), an agency of the United States Department of Homeland Security, collects customs duties and regulates international trade. It has a workforce of over 58,000 employees covering over 300 official ports of entry to the United States. CBP has authority to seize and dispose of cargo in the case of certain violations of customs rules.
Every state in the United States has its own tax administration, subject to the rules of that state's law and regulations. These are referred to in most states as the Department of Revenue or Department of Taxation. The powers of the state taxing authorities vary widely. Most enforce all state level taxes but not most local taxes. However, many states have unified state-level sales tax administration, including for local sales taxes.
State tax returns are filed separately with those tax administrations, not with the Federal tax administrations. Each state has its own procedural rules, which vary widely.
Most localities within the United States administer most of their own taxes. In many cases, there are multiple local taxing jurisdictions with respect to a particular taxpayer or property. For property taxes, the taxing jurisdiction is typically represented by a tax assessor/collector whose offices are located at the taxing jurisdiction's facilities.
The United States Constitution provides that Congress "shall have the power to lay and collect Taxes, Duties, Imposts, and Excises ... but all Duties, Imposts, and Excises shall be uniform throughout the United States."[69] Prior to amendment, it provided that "No Capitation, or other direct, Tax shall be Laid unless in proportion to the Census ..." The 16th Amendment provided that "Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." The 10th Amendment provided that "powers not delegated to the United States by this Constitution, nor prohibited to the States, are reserved to the States respectively, or to the people."
Congress has enacted numerous laws dealing with taxes since adoption of the Constitution. Those laws are now codified as Title 19, Customs Duties, Title 26, Internal Revenue Code, and various other provisions. These laws specifically authorize the United States Secretary of the Treasury to delegate various powers related to levy, assessment and collection of taxes.
State constitutions uniformly grant the state government the right to levy and collect taxes. Limitations under state constitutions vary widely.
Various individuals and groups have questioned the legitimacy of United States federal income tax. These arguments are varied, but have been uniformly rejected by the Internal Revenue Service and by the courts and ruled to be frivolous.[70][71][72]
Distribution of U.S. federal taxes for 2000 as a percentage of income among the family income quintiles.
Each major type of tax in the United States has been used by some jurisdiction at some time as a tool of social policy. Each has been criticized as too regressive and as too progressive. Proposals have been made to replace each major type of tax with another type of tax.
Before 1776, the American Colonies were subject to taxation by the United Kingdom, and also imposed local taxes. Property taxes were imposed in the Colonies as early as 1634.[73] In 1673, the UK Parliament imposed a tax on exports from the American Colonies, and with it created the first tax administration in what would become the United States.[74] Other tariffs and taxes were imposed by Parliament. Most of the colonies and many localities adopted property taxes.
Under Article VIII of the Articles of Confederation, the United States Federal government did not have the power to tax. All such power lay with the states. The United States Constitution, adopted in 1787, authorized the Federal government to lay and collect taxes, but required that some types of tax revenues be given to the states in proportion to population. Tariffs were the principal Federal tax through the 1800s.
By 1796, state and local governments in fourteen of the 15 states taxed land. Delaware taxed the income from property. By the American Civil War, the principle of taxation of property at a uniform rate had developed, and many of the states relied on property taxes as a major source of revenue. However, the increasing importance of intangible property, such as corporate stock, caused the states to shift to other forms of taxation in the 1900s.
Income taxes in the form of "faculty" taxes were imposed by the colonies. These combined income and property tax characteristics, and the income element persisted after 1776 in a few states. Several states adopted income taxes in 1837.[75] Wisconsin adopted a corporate and individual income tax in 1911,[76] and was the first to administer the tax with a state tax administration.
The first Federal income tax was adopted as part of the Revenue Act of 1861.[77] The tax lapsed after the American Civil War. Subsequently enacted income taxes were held to be unconstitutional by the Supreme Court because they were not given to the states. In 1913, the Sixteenth Amendment was ratified, permitting the Federal government to levy an income tax without giving all of it to the states.
U.S. federal government tax receipts as a percentage of GDP from 1945 to 2015 (note that 2010 to 2015 data are estimated).
The Federal income tax enacted in 1913 included corporate and individual income taxes. It defined income using language from prior laws, incorporated in the Sixteenth Amendment, as “all income from whatever source derived.” The tax allowed deductions for business expenses, but few non-business deductions. In 1918 the income tax law was expanded to include a foreign tax credit and more comprehensive definitions of income and deduction items. Various aspects of the present system of definitions were expanded through 1926, when U.S. law was organized as the United States Code. Income, estate, gift, and excise tax provisions, plus provisions relating to tax returns and enforcement, were codified as Title 26, also known as the Internal Revenue Code. This was reorganized and somewhat expanded in 1954, and remains in the same general form.
Federal taxes were expanded greatly during World War I. In 1921, wealthy industrialist and then Treasury Secretary Andrew Mellon engineered a series of significant income tax cuts under three presidents. Mellon argued that tax cuts would spur growth.[78] The last such cut in 1928 was followed by the Great Depression in 1929. Taxes were raised again in the latter part of the Depression, and during World War II. Income tax rates were reduced significantly during the Johnson, Nixon, and Reagan Presidencies. Significant tax cuts for corporations and upper income individuals were enacted during the second Bush Presidency.
In 1986, Congress adopted, with little modification, a major expansion of the income tax portion of the Internal Revenue Code proposed in 1985 by the U.S. Treasury Department under President Reagan. The thousand page Tax Reform Act of 1986 significantly lowered tax rates, adopted sweeping expansions of international rules, eliminated the lower individual tax rate for capital gains, added significant inventory accounting rules, and made substantial other expansions of the law.
Federal income tax rates have been modified frequently. Tax rates were changed in 34 of the 97 years between 1913 and 2010.[79] The rate structure has been graduated since the 1913 act.
The first individual income tax return Form 1040 under the 1913 law was four pages long. In 1915, some Congressmen complained about the complexity of the form.[80] In 1921, Congress considered but did not enact replacement of the income tax with a national sales tax.
By the 1920s, many states had adopted income taxes on individuals and corporations.[81] Many of the state taxes were simply based on the Federal definitions. The states generally taxed residents on all of their income, including income earned in other states, as well as income of nonresidents earned in the state. This led to a long line of Supreme Court cases limiting the ability of states to tax income of nonresidents.
The states had also come to rely heavily on retail sales taxes. However, as of the beginning of World War II, only two cities (New York and New Orleans) had local sales taxes.[82]
The Federal Estate Tax was introduced in 1916, and Gift Tax in 1924. Unlike many inheritance taxes, the Gift and Estate taxes were imposed on the transferor rather than the recipient. Many states adopted either inheritance taxes or estate and gift taxes, often computed as the amount allowed as a deduction for Federal purposes. These taxes remained under 1% of government revenues through the 1990s.[83]
All governments within the United States provide tax exemption for some income, property, or persons. These exemptions have their roots both in tax theory,[84] Federal and state legislative history,[85] and the United States Constitution.[86]
- ^ JCX-49-11, Joint Committee on Taxation, September 22, 2011, pp 48, 50. http://www.jct.gov/publications.html?func=startdown&id=4363
- ^ 26 USC 1 and 26 USC11; IRS Publication 17 and Publication 542.
- ^ See, e.g., IRS Publication 17, page 45.
- ^ 26 USC 1; IRS [ Publication 17], page 266.
- ^ 26 USC 11; IRS Publication 542.
- ^ 26 USC 61; IRS Publication 17, Part II.
- ^ 26 USC 161-249; IRS Publication 17, Publication 501 and Publication 535.
- ^ 26 USC 446-475; IRS [ Publication ].
- ^ 26 USC 101-140.
- ^ 26 USC 161-199; IRS Publication 535.
- ^ 26 USC ; IRS Publication 17, Chapters 21-28.
- ^ 26 USC 274; IRS Publication 463.
- ^ IRS Regulations at 26 CFR 1. 446-1; IRS Publication 538.
- ^ 26 USC 151; IRS Publication 501.
- ^ 26 USC 63; IRS Publication 501.
- ^ 26 USC 68; IRS Publication 17, Chapter 29.
- ^ 26 USC 11; IRS Publication 542.
- ^ 26 USC 61(a)(7).
- ^ 26 USC 701; IRS Publication 541.
- ^ 26 CFR 301.7701-2; IRS Form 8832.
- ^ 26 USC 512; IRS Publication 598.
- ^ 26 USC 332-368; IRS Publication 542.
- ^ 26 USC 21-54AA.
- ^ 26 USC 6654 and 26 USC 6655; IRS Publication 505.
- ^ 26 USC 3102 and 26 USC 3402; IRS Publication 15.
- ^ Contrast to, e.g., the United Kingdom system in which all withholding amounts are determined by Inland Revenue.
- ^ Hellerstein, Jerome H., and Hellerstein, Walter, State and Local Taxation, Cases and Materials, Eighth Edition, 2001 (hereafter "Hellerstein"), page 929.
- ^ 26 USC 871-898; IRS Publication 515.
- ^ 26 USC 55-59; IRS Form 6251 instructions.
- ^ 26 USC 6201(a)(1); IRS [ Publication ].
- ^ 26 USC 6011.
- ^ A tutuorial is available online from the Internal Revenue Service (IRS) explaining various aspects of employer compliance, see Video Tutorial.
- ^ The determination of whether a person performing services is an employee subject to payroll tax or an independent contractor who self assesses tax is based on 20 factors. See IRS Publication 15 and the tutorial referenced above. For Federal requirements, see 26 USC 3401-3405.
- ^ IRS Form W-4
- ^ 26 USC 31.
- ^ 26 USC 3111
- ^ 26 USC 3101.
- ^ Note that an equivalent Self Employment Tax is imposed on self employed persons, including independent contractors, under 26 USC 1401. Wages and self employment income subject to these taxes are defined at 26 USC 3121 and 26 USC 1402 respectively.
- ^ IRS.gov
- ^ 26 USC 31(b) and 26 USC 6413(c).
- ^ 26 USC 3301.
- ^ As defined in 26 USC 3306(b).
- ^ State tax rates and caps vary. For example, Texas imposes up to 8.6% tax on the first $9,000 of wages ($774), while New Jersey imposes 3.2% tax on the first $28,900 for wages ($924). Federal tax of 6.2% less a credit for state taxes limited to 5.4% applies to the first $7,000 of wages (net $56).
- ^ See, e.g., New Jersey.
- ^ See, e.g., IRS Form 941. Electronic filing may be required.
- ^ See, e.g., IRS Form 940.
- ^ IRS Form W-2
- ^ See IRS Form W-2 Instructions. Note that some states and cities obtain their W-2 information from the IRS and from taxpayers directly.
- ^ See 26 USC 6302 and IRS Publication 15 for Federal requirements. EFT is required for Federal payments if aggregate Federal tax payments, including corporate income tax and payroll taxes, exceeded $200,000 in the preceding year. See, e.g., NJ Income Tax - Reporting and Remitting, New Jersey requirements for weekly EFT payment where prior year payroll taxes exceeded $10,000.
- ^ 26 USC 6656.
- ^ 26 USC 6721.
- ^ 26 USC 6672.
- ^ Quill Corp. v. North Dakota and National Bellas Hess v. Illinois both prohibit states from imposing a sales and use tax collection obligation on out of state sellers with no nexus in the state.
- ^ Hellerstein, page 96.
- ^ Compare The Illinois Property Tax System (hereafter “IL System”), Louisiana Property Tax Basics (hereafter “La. Basics”),New York pamphlet How Property Tax Works (hereafter “NY Taxworks”), and Texas Property Tax Basics (hereafter “Texas Basics).
- ^ Fisher, Glen, History of Property Taxes in the United States, 2002.
- ^ Such date varies by jurisdiction, and may be referred to as the assessment date, valuation date, lien date, or other term.
- ^ See La. Basics, Example 13.
- ^ See, e.g., IL System, page 11.
- ^ Generally, tax assessors send the bills. In Louisiana, however, the parish sheriff is responsible for billing and collection of property tax. See La. Basics, page 2.
- ^ U.S. Customs and Border Protection booklet Importing into the United States (“CBP Booklet”), page 11.
- ^ The January 2011 edition in .pdf exceeds 3,000 pages, including country-specific rules and annotations.
- ^ A higher rate of duty (up to 81%) applies to goods from Cuba or North Korea.
- ^ CBP Booklet, page 24.
- ^ CBP Booklet, page 151.
- ^ See IRS Publication 950, Introduction to Estate and Gift Taxes.
- ^ Nonresident aliens are subject to estate and gift tax only on property interests considered to have U.S. situs.
- ^ CBP website says Department of Homeland Security at bottom right of page
- ^ Constitution Article I Section 8.
- ^ Frivolous Tax, Internal Revenue Service
- ^ United States v. Thomas, 788 F.2d 1250, (7th Cir. 1986), cert. denied, 107 S.Ct. 187 (1986); United States v. Benson, 941 F.2d 598, 91-2 U.S. Tax Cas. (CCH) paragr. 50,437 (7th Cir. 1991); Knoblauch v. Commissioner, 749 F.2d 200, 85-1 U.S. Tax. Cas. (CCH) paragr. 9109 (5th Cir. 1984), cert. denied, 474 U.S. 830 (1985); Ficalora v. Commissioner, 751 F.2d 85, 85-1 U.S. Tax Cas. (CCH) paragr. 9103 (2d Cir. 1984); Sisk v. Commissioner; 791 F.2d 58, 86-1 U.S. Tax Cas. (CCH) paragr. 9433 (6th Cir. 1986); United States v. Sitka, 845 F.2d 43, 88-1 U.S. Tax Cas. (CCH) paragr. 9308 (2d Cir.), cert. denied, 488 U.S. 827 (1988); United States v. Stahl, 792 F.2d 1438, 86-2 U.S. Tax Cas. (CCH) paragr. 9518 (9th Cir. 1986), cert. denied, 107 S. Ct. 888 (1987); United States v. House, 617 F. Supp. 237, 87-2 U.S. Tax Cas. (CCH) paragr. 9562 (W.D. Mich. 1985); Ivey v. United States, 76-2 U.S. Tax Cas. (CCH) paragr. 9682 (E.D. Wisc. 1976).
- ^ Brown v. Commissioner; 53 T.C.M. (CCH) 94, T.C. Memo 1987-78, CCH Dec. 43,696(M) (1987); Lysiak v. Commissioner; 816 F.2d 311, 87-1 U.S. Tax Cas. (CCH) paragr. 9296 (7th Cir. 1987); and Miller v. United States, 868 F.2d 236, 89-1 U.S. Tax Cas. (CCH) paragr. 9184 (7th Cir. 1989). For background on how arguments that the tax laws are unconstitutional may help the prosecution prove willfulness in tax evasion cases, see the United States Supreme Court decision in Cheek v. United States, 498 U.S. 192 (1991) (defendant arguing about constitutionality may be evidence that the defendant was aware of the tax law, and is not a defense to a charge of willfulness).
- ^ Jens P. Jensen, Property Taxation in the United States, 1931, referring to a 1634 Massachusetts property tax statute.
- ^ Tax History Museum 1660-1712, Tax Analysts.
- ^ Hellerstein, page 928.
- ^ Hellerstein, page 431.
- ^ Revenue Act of 1861, sec. 49, ch. 45, 12 Stat. 292, 309 (Aug. 5, 1861).
- ^ Tax History Museum, 1901-1932.
- ^ See changes in 1916, 1917, 1918, 1921, 1922, 1924, 1926, 1928, 1932, 1934, 1935, 1936, 1940, 1941, 1942, 1943, 1944, 1945, 1948, 1950, 1951, 1953, 1954, 1964, 1968, 1969, 1975, 1978, 1981, 1986, 1993, 1997, 2001, and 2003.
- ^ Tax History Museum covering 1914-1915.
- ^ Hellerstein, pages 431 and 429.
- ^ Hellerstein, page 10.
- ^ Federal Budget 2012 historical tables 2.4 and 2.5. Census Bureau state tax summary table, year 2000.
- ^ See, e.g., Martin, James W. et al, Tax Exemptions, Tax Policy League, New York, cited in Hellerstein, pages 1013-1017.
- ^ The 1861 Federal income tax exempted religious, charitable, educational, and scientific organizations.
- ^ The Supreme Court ruled that the Federal government is immune from state taxation in McCulloch v. Maryland, 17 US 316 (1819).
Government sources:
Law & regulations:
Standard texts (most updated annually):
- Pratt, James W.; Kulsrud, William N.; et al, Federal Taxation", updated periodically. 2010 edition ISBN 978-1-4240-6986-6 (cited above as Pratt & Kulsrud 2005).
- Whittenberg, Gerald; and Altus-Buller, Martha, Income Tax Fundamentals 2010, ISBN 978-1-4390-4409-4
- Willis, Eugene; Hoffman, William H. Jr.; et al., South-Western Federal Taxation, published annually. 2009 edition included ISBN 9730324660600 (student) and ISBN 978-0-324-66208-5 (instructor).
- Hellerstein, Jerome R., and Hellerstein, Walter, State and Local Taxation: Cases and Materials, 2005, ISBN 978-0-314-15376-0
- Hellerstein, Jerome R., and Hellerstein, Walter, State Taxation, currently available as a subscription service, 2010
Reference works (annual):
Popular publications (annual):
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