Individual Income Taxes in the United States
This type of tax is a major source of revenue for both the federal and state governments (37% of state government revenue in 2017).
43 states levy individual income taxes: 41 in the form of a payroll and income tax, and 2 more (New Hampshire and Tennessee) only tax dividends and interest income.
Nine states have a flat tax rate, while 33 states levy income taxes on a progressive tiered scale and the number of these tiers differs from state to state. Hawaii has the highest number of tiers at 12.
The progressive tax system is quite interesting. To understand how it works, let’s look at an example from which all the nuances become clear.
For example, you are a single young man who lives in California and your annual income is $50,000 (which is very low for this state, but the amount is taken to simplify the calculations).
- For the first $9700 of your $50000, your tax rate will be 10% and you will pay $970.
- For the next income range of $9700 to $39475, which is $29775, the tax rate is 12% and you pay $3573;
- For the next range, you no longer reach the total income of $84,000, so only the difference between $50,000 and $39475 will be taxed at 22%. The tax base for this range would be $10525, and the payout amount: 10525*0.22= $2315,5
- To determine the full amount of income tax, it remains to add up all the parts received at each of the steps: 970+3573+2315.5=$6858.5. That is, in our case the effective tax rate was not 22%, but only 13.7%.
The highest rates are in New Jersey, California, New York, and Hawaii. Wyoming, South Dakota, Florida, Nevada and Alaska have no regional income tax.
As you can see, it’s not complicated. All you have to do is delve into it once and it all falls into place. One more thing to keep in mind: the scale with income and tax rates may differ within one state for singles, married couples filing a joint tax return, and married couples filing a tax return on behalf of each family member.
U.S. Corporate Tax
The corporate tax rate also differs from state to state and is generally about 19.7% of the regional government’s income.
A total of 44 states levy a corporate tax, with the rate ranging from 2.5% in North Carolina to 12% in Iowa.
Nevada, Ohio, Texas, and Washington use gross receipts taxes instead of income taxes (this type of tax is thought to be less economically sound than corporate income taxes).
South Dakota and Wyoming are the only states that do not tax corporate income or gross corporate income. Remember the names of these states, we’ll come back to them more than once
A couple more important points about the corporate tax:
- U.S. resident companies take into account income that is earned not only within the U.S. but also outside the country when calculating their taxable income.
- Foreign companies that earn income within the U.S. are taxed on a progressive scale, similar to resident companies. This income includes interest, dividends, royalties, and rental payments. A double tax treaty can reduce tax rates. Such an agreement exists between the United States and more than 60 countries, including Ukraine, Belarus, Georgia, Russia, Moldova, the Baltic states, Israel, and others.