Taxation in the
United States |
|
|
|
|
|
|
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, payroll, property, sales, imports, estates and gifts,
as well as various fees. In 2010 taxes collected by federal, state and
municipal governments amounted to 24.8% of
GDP. In the
OECD, only
Chile and
Mexico
taxed less as a share of GDP.[1]
Taxes are imposed on net income of individuals and corporations by
the federal, most state, and some local governments. Citizens and
residents are taxed on worldwide income and allowed a credit for foreign
taxes. Income subject to tax is determined under tax accounting rules,
not financial 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 10%
to 35% of taxable income. State and local tax rates vary widely by
jurisdiction, from 0% to 12.696%, and many are graduated. State taxes
are generally treated as a deductible expense for federal tax
computation. Certain alternative taxes may apply. The United States is
the
only country in the world that taxes its nonresident citizens on
worldwide income, in the same manner and rates as residents.
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 and
2012). 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 to employers.
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 by most states and some localities on the
price at retail sale of many goods and some services. 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.
These tariffs or duties 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.
Estate and
gift
taxes are imposed by the federal and some state governments on the
transfer of property inheritance, by will, or by life time donation.
Similar to federal income taxes, federal estate and gift taxes are
imposed on worldwide property of citizens and residents and allow a
credit for foreign taxes.
Levels
and types of taxation
Federal government receipts by source, 2010.
[2]
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. Other 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 user fees or
license fees are also imposed.
Types of taxpayers
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, transfers, importations of
goods, business activities, 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.
Income tax
ITEP estimate of the total effective tax rate for
federal, state and local taxes (personal and corporate
income, payroll, property, sales, excise, estate, etc.) by
income level in 2011.
[3]
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.
Basic concepts
The U.S. income tax system imposes a tax based on income on
individuals, corporations, estates, and trusts.[4]
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.
Federal receipts by source as share of total receipts
(1950-2010). Individual income taxes (blue), payroll
taxes/FICA (green), corporate income taxes (red), excise
taxes (purple), estate and gift taxes (light blue), other
receipts (orange).
[5]
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 citizens and residents.[6]
A federal
foreign tax credit is granted for foreign income taxes. Individuals
residing abroad 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.
Filing status
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.
Graduated tax
rates
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%.[8]
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.[9]
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.
2012
Federal income tax brackets
Marginal Tax Rate[10] |
Single |
Married Filing Jointly or Qualified Widow(er) |
Married Filing Separately |
Head of Household |
10% |
$0 to $8,700 |
$0 to $17,400 |
$0 to $8,700 |
$0 – $12,400 |
15% |
$8,700 to $35,350 |
$17,400 to $70,700 |
$8,700 to $35,350 |
$12,400 - $47,350 |
25% |
$35,350 to $85,650 |
$70,700 to $142,700 |
$35,350 to $71,350 |
$47,350 - $122,300 |
28% |
$85,650 to $178,650 |
$142,700 to $217,450 |
$71,350 to $108,725 |
$122,300 - $198,050 |
33% |
$178,650 to $388,350 |
$217,450 to $388,350 |
$108,725 to $194,175 |
$198,050 - $388,350 |
35% |
$388,350+ |
$388,350+ |
$194,175+ |
$388,350+ |
Income
Main article:
Gross income
Taxable income is
gross income
[11] less adjustments and allowable
tax deductions.[12]
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.[13]
Certain types of income are excluded from gross income (and therefore
subject to
tax exemption).[14]
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 nonresident persons are taxed only on income from U.S.
sources or from a U.S. business. Tax on foreign nonresident persons on
non-business income is at 30% of the gross income, but reduced under
many
tax
treaties.
Deductions
and exemptions
The share of total income and federal, state and local taxes
paid by income group. Total taxes include income taxes,
payroll taxes, state and local sales taxes, federal and
state excise taxes, and local property taxes.
[15]
Main article:
Tax deduction
The U.S. system allows reduction of taxable income for both business[16]
and some nonbusiness[17]
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.[18]
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.[19]
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
[20] and either a fixed
standard deduction or
itemized deductions.[21]
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.[22]
Business entities
Corporations must pay tax on their taxable income independently of
their shareholders.[9]
Shareholders are also subject to tax on dividends received from
corporations.[23]
By contrast, partnerships are not subject to income tax, but their
partners calculate their taxes by including their shares of partnership
items.[24]
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.[25]
States generally follow such characterization. Many states also allow
corporations to elect S corporation status. Charitable organizations are
subject to tax on business income.[26]
Certain transactions of business entities are not subject to tax.
These include many types of formation or reorganization.[27]
Credits
A wide variety of tax credits may reduce income tax at the federal[28]
and state levels. Some credits are available only to individuals, such
as the
child tax credit for each dependent child,
American Opportunity Tax Credit
[29] for education expenses, 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.
Payment or withholding of taxes
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.[30]
Employers must withhold income tax, as well as Social Security and
Medicare taxes, from wages.[31]
Amounts to be withheld are computed by employers based on
representations of tax status by employees on
Form W-4, with limited government review.[32]
State variations
Composition of state and local government tax revenue for
sample state of Ohio, 2007.
[33]
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.[34]
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.
Nonresidents
Foreign 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.[35]
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.
Alternative tax bases (AMT, states)
Average tax rate percentages for the highest-income U.S.
taxpayers, 1945-2009
An
Alternative Minimum Tax (AMT) is imposed at the federal level on a
somewhat modified version of taxable income.[36]
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.
Differences between book and taxable income for businesses
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.
Reporting under self-assessment system
GDP per capita growth rate in the United States versus the
top marginal tax rates, 1945-2010. GDP growth is not
correlated to top marginal tax rates.
[37]
Income taxes in the United States are self-assessed by taxpayers
[38] by filing required tax returns.[39]
Taxpayers, as well as certain nontaxpaying 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.
Payroll taxes
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.[40]
Income tax
withholding
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.[42]
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.[43]
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.[44]
Social Security and Medicare taxes
Federal social insurance taxes are imposed equally on employers[45]
and employees,[46]
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.[47]
For 2011, the employee's contribution was reduced to 4.2%, while the
employer's portion remained at 6.2%.[48]
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.[49]
Unemployment taxes
State employment growth versus change in tax liability for
top 10% income earners in the United States. Tax increases
on high income earners are not linked to decreased
employment growth.
[50]
Employers are subject to unemployment taxes by the federal[51]
and all state governments. The tax is a percentage of taxable wages[52]
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.[53]
Some states also impose unemployment, disability insurance, or similar
taxes on employees.[54]
Reporting and
payment
State employment growth versus change in tax liability for
bottom 90% income earners in the United States. Tax
decreases on the bottom 90% income earners are correlated
with increased employment growth.
[55]
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.[56]
Employers must file reports of aggregate unemployment tax quarterly and
annually with each applicable state, and annually at the federal level.[57]
Each employer is required to provide each employee an annual report
on IRS Form W-2[58]
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.[59]
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.[60]
Penalties
Failure to timely and properly pay federal payroll taxes results in
an automatic penalty of 2% to 10%.[61]
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.[62]
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.[63]
Sales and
excise taxes
Sales and use tax
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.
The average effective sales tax for different income groups
of the combined 50 States (2007).
[64]
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.[65]
Excise taxes
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.
Property taxes
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.[66]
Rules vary widely by jurisdiction.[67]
Many overlapping jurisdictions (counties, cities, school districts) may
have authority to tax the same property.[68]
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,[69]
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.[70]
Assessment ratios and tax rates vary widely among jurisdictions, and may
vary by type of property within a jurisdiction.[71]
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.
Types of
property taxed
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.
Assessment
and collection
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.[72]
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.
Customs duties
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.
Import of goods
Total
tax revenue as share of GDP for OECD countries in 2009.
The tax burden in the US (black) is relatively small in
comparison to other industrialised countries.
[73]
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.”[74]
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.
Origin
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.
Classification
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[75]
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.
Duty rate
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.[76]
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.[77]
Procedures
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.
Penalties
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
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.[78]
Estate and gift
tax
Estate and gift taxes in the United States are imposed by the federal
and some state governments.[79]
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).
Estate tax returns as a percentage of adult deaths, 1982 -
2008.
[80]
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 nonresident
aliens, most gifts of any property by citizens or 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 alien
decedents, and most property of citizens or residents. For aliens,
residence for estate tax purposes is primarily based on domicile, but
U.S. citizens are taxed regardless of their country of residence. 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,
citizen or alien.
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.[81]
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.
Licenses and occupational taxes
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.
User fees
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.
Tax administration
The total tax revenue as a percentage of
GDP for the U.S. over the past several decades compared
to other first world nations.
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.[82]
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.
Federal
Internal
Revenue Service
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.
Examination
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.
Published and private rulings
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:
Alcohol and Tobacco Tax and Trade Bureau
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 has 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
- Tobacco Enforcement Division: enforcement actions for tobacco
- 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.
Customs
and Border Protection
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.
State
administrations
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.
Local
administrations
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.
Legal basis
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."[83]
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.[84][85][86]
Policy issues
The 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.[citation
needed] Proposals have been made to replace each
major type of tax with another type of tax.[citation
needed]
Tax evasion
The Internal Revenue Service estimated that in 2001 the tax gap was
$345 billion.[87]
The tax gap is the difference between the amount of tax legally owed and
the amount actually collected by the government. The tax gap in 2006 was
estimated to be $450 billion.[88]
The tax gap two years later in 2008 was estimated to be in the range of
$450–$500 billion and unreported income was estimated to be
approximately $2 trillion.[89]
Therefore, 18-19 percent of total reportable income was not properly
reported to the IRS.[89]
History
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.[90]
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.[91]
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.[92]
Wisconsin adopted a corporate and individual income tax in 1911,[93]
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.[94]
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.[95]
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.[96]
The rate structure has been graduated since the 1913 act.
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.
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.[97]
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.[98]
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.[99]
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.[100]
All governments within the United States provide
tax exemption for some income, property, or persons. These
exemptions have their roots both in tax theory,[101]
Federal and state legislative history,[102]
and the United States Constitution.[103]