Federal income tax
U.S. Federal government levies the income tax on the annual earnings of the individuals and businesses, which are the legal entities of United States. This tax is levied by the internal revenue Service (IRS) of United States. This income tax is applied on the entire taxable income in any form like salary, employment earning or capital gains.
Here, it is important to make a distinction between state income tax and federal income tax. In United States, in addition to federal income tax, states also levy income tax on the individuals and businesses. But all the states in US have not implemented the state level tax. For instance, Texas and Florida are two states where there is no state level income tax.
Federal government levies tax according to the level of income of individuals and businesses. Like all other governments in the world, US government also use the revenue gained from federal income tax funding the developmental work like schools, roads, defense and basic things.
Federal Income Tax has many different forms; individual income tax, corporate tax, Capital gains, Medicare, social security, payroll taxes. The Federal Income Tax system is progressive in USA as it increases with eth level of income. This means the proportion of income tax as part of income will rise with increasing income.
Personal Income Tax
Personal Income tax is levied on the individuals on their annual earnings. This income of the individual includes all sources which include wages, gains from sale of eth stock, dividend from the stock and unearned income. The person who is filing the return should disclose all the sources of his income to determine the gross income. To determine the taxable income , (actual amount o which tax is paid), he needs to apply the relevant tax deductions.
Alternative Minimum Tax
Established in 1969, objective of this tax was to make sure that wealthy do not avoid paying tax by claiming large tax deductions. If a person earns more than $75,000, he or she becomes liable to pay under AMT. AMT uses different formula to calculate the taxable income than the standard one. Government allows less of tax deductions under AMT. If the amount of Tax calculated is more than the tax calculated under standard tax, then person is liable to pay AMT.
Capital Gains Tax
Capital gains are the difference between the cost of the asset bought like stock, bond or piece of real estate and the price at which it is sold. Tax on capital gains is different than the tax on regular income.
Corporate Tax
Corporate tax is levied on the companies and organizations. They pay tax on eth profit which is revenue minus expenses. Corporate also deduct losses of previous year to determine the taxable amount.
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