Mastering the Fundamentals of U.S. Taxation

Confused about how the U.S. taxes work? Whether you’re a resident, expat, or just earning U.S. income, this guide is your shortcut to understanding the federal, state, and local taxes. From US tax brackets to compliance tips —we’ll help you navigate the system without stress. Let’s dive in!

1️⃣ Federal Taxes

These are taxes imposed by the U.S. federal government, collected by the Internal Revenue Service (IRS), and apply to everyone regardless of which state you live in.

Major Federal Taxes:

Тах Туре
Description
Example
Income Tax
Tax on wages, salaries,
dividends, and other income
Progressive tax
brackets (10%-37%)
Corporate Tax
Tax on the profits
of U.S. corporations
Flat 21% on
corporate profits
Payroll Taxes
For Social Security
and Medicare (FICA)
7.65% from employees,
matched by employers
Capital Gains Tax
Tax on profits from
selling assets (stocks, property)
0%, 15%, or 20%,
depending on income
Estate Tax
Tax on large
inheritances or estates
(over $13.61 million in 2024)
18%-40% on
amounts exceeding
the exemption
Gift Tax
Tax on large gifts
made during your life time
million in 2024)
Up to 40%, with exclusions
($18,000 per person in 2024)
Excise Tax
Taxes on specific
goods like gasoline,
tobacco, alcohol
Federal gas tax
of 18.4 cents/gallon

📌 Key Points:

  • Paying United States taxes helps fund essential national services like defense, healthcare, infrastructure, and education.
  • The federal taxes we pay follow a progressive tax system—meaning the higher your income, the higher your tax rate.
  • Even U.S. citizens living abroad must file a federal tax return each year, no matter where they live.

2️⃣ State Taxes

These taxes are charged by individual states, and rates and types of taxes vary widely across the 50 states.

Common State Taxes:

Тах Туре
Description
Example
State Income Tax
Tax on income (not in all states)
Ranges from 0%
(Texas, Florida) to 13.3% (California)
Sales Tax
Tax on goods and services
at the point of sale
4% to 7% on average
(higher in some areas)
Property Tax
Tax on real estate,
based on assessed value
Varies by state and county
(around 1% of property
value on average)
State Corporate Tax
Tax on businesses' profits
1% to 12% depending
on the state
Unemployment Tax (SUTA)
Paid by employers to
fund state unemployment benefits
Rates vary by state
and employer's history
Excise Taxes
Additional taxes on
specific items
Alcohol, fuel, and
tobacco have extra state taxes

📌 Key Points:

  • Nine states have no state income tax (including Florida, Texas, and Nevada).
  • Sales taxes often apply to physical goods but may also apply to services.
  • Property taxes fund local schools, police, and infrastructure.

3️⃣ Local Taxes

These are imposed by cities, counties, and municipalities, often as an extra layer on top of state taxes.

Common Local Taxes:

Тах Туре
Description
Example
Local Income Tax
Some cities impose a tax on earned income
New York City charges up to 3.876%
Local Sales Tax
Added to the state sales tax rate
Los Angeles: 9.5% combined rate (state + local)
Property Tax (Local)
Most property taxes are collected locally
Used to fund local services like schools
Occupational Tax
Fee for working within certain city limits
Charged in some areas like St. Louis
Hotel/Lodging Tax
Charged on short-term stays
Often 5% -12%, depending on the city

📌 Key Points:

  • Local taxes fund services like trash collection, police, fire departments, and parks.
  • Tax rates vary significantly based on city and county.
  • Local income taxes are less common but can affect workers in specific cities.

✅ Quick Example:

🔹 Living and working in New York City

If you live and work in NYC, your tax burden may include:

  • Federal income tax (progressive up to 37%).
  • New York State income tax (up to 10.9%).
  • New York City income tax (up to 3.876%).
  • Sales tax on purchases (8.875% total).
  • Property tax if you own real estate.
  • Payroll taxes if you’re employed.

✅ Summary Table:

Level
Tax Types
Who Pays
Federal
Income, Corporate, Estate, Payroll, Excise
All U.S. Residents/Citizens
State
Income, Sales, Property, Corporate
Varies by state, residents, businesses
Local
Income, Sales, Property, Hotels, Occupational
Residents or workers in certain areas

In The End:

US Taxation isn’t just about what comes out of your paycheck—it impacts nearly every aspect of your financial life, from what you earn to what you spend and even what you own. Understanding how the federal, state, and local taxes work can help you make smarter money decisions, reduce what you owe, and stay on the right side of the law.

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Shweta Goyal

CA | CPA Exams Passed | Expert in U.S. & Indian Taxation, Accounting & Compliance

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