Despite the variety of taxes that exist in the U.S. – as well as the multi-level control over their payment – there are a growing number of citizens who are exempt from paying taxes through exemptions.

The number of legal tax defaulters has grown especially large since the 1986 reform, which doubled the personal exemption and also introduced new forms of tax credit: the Earned Income Credit, the Child Tax Credit, the Education Credit, etc.

One example of a tax credit, is the ability to use part of a home as an office for business activities and thereby deduct home office costs on their tax returns.

Programs such as the American Opportunity Tax Credit, a tax credit for parents during the first 4 years of a child’s education, are also widely used in the U.S. Some states give tax credits for education of children in elementary and high schools (as a rule they are valid for education of the child in public schools of the state).

Much attention in the U.S. is paid to the benefits for individual investors who invest in innovative businesses. For investors, whose normal rate of taxation of capital gains is 15%, the real rate is only 7.5%.

Traditionally, one of the most “favorable” areas of business is farming. In dry years, some farms manage to reduce their tax base to zero.

The taxation of capital gains is one of the most controversial issues in public finance in all developed countries and the United States is no exception. Relatively high effective tax rates on capital gains, especially in the corporate sector, can discourage investment and overall economic growth.

In the case of the U.S., capital gains are included in the taxable income of U.S. corporations. Only capitalization losses may be taken into account in determining such income.

For example, if a U.S. resident invested $5,000 in his business and later sold the company for $75,000, the difference of $70,000 will be considered capital gain and taxable. But if in the same period he sold another company for $50,000 in which he had previously invested $100,000, then such a transaction would be considered a capital loss. The difference between the capital gain of $70,000 and the capital losses of $50,000 would be taxable.

Capital assets generally include anything a person owns and uses for personal, pleasure, or investment purposes, including stocks, bonds, homes, cars, jewelry, and artwork.

It’s important to note another feature of this type of tax: If an asset was held for less than one year and then sold for a profit, it is classified as a short-term capital gain and taxed as ordinary income. If, however, the asset was held for more than one year before sale, the gain on that sale is classified as a long-term capital gain.

The rates on long-term capital gains are 0%, 15%, and 20%, but the limits on taxable income depend on who is filing: unmarried individuals, married couples (filing joint returns), heads of households or organizations, and trusts.

The corporate tax is the first modern tax in the United States and was introduced back in 1909

Sales tax is a kind of analog of our usual VAT, an indirect tax imposed on the consumer when buying a product or service. It can be levied both at the state and local level. It often exempts food, utilities, clothing, printed matter, and necessities. Each state has its own list of items that are exempt from sales tax.

As of 2020, 45 states and the District of Columbia collect sales tax. Local sales taxes are collected in an additional 38 states and sometimes there is a situation where these taxes compete or even where local sales tax rates are higher than the state tax rate.

Five states have no sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. But it should be noted that Alaska allows for local sales taxes in its territory.

The table below shows the 5 states with the highest combined sales tax rate (state + local tax rate) and the 5 states with the lowest.

The sales tax is considered the most transparent of all U.S. taxes, it does not need to be calculated and specifically paid, its amount is listed on every receipt accompanying a purchase.

Given that sales tax only applies to purchases within the state, when it comes to the use, storage, or other form of consumption of goods purchased outside the state, the use tax applies. It usually occurs when property is rented out or when large items are purchased and used within the state (a car or equipment to be used within the state).