US Federal Tax Types and Rates

The United States federal tax system is a complex framework designed to fund government operations and services. It includes several key tax categories, each with its own rates and regulations. These taxes are essential for maintaining the country's infrastructure, providing public services, and ensuring economic stability.

One of the primary federal taxes is the income tax, which applies to both individuals and businesses. For individuals, the federal income tax is progressive, meaning that it imposes higher tax rates on higher income levels. The Internal Revenue Service IRS outlines seven income brackets, ranging from 10% for the lowest earners to 37% for the highest. For example, as of 2024, if an individual earns between $44,725 and $95,375, they would be taxed at a rate of 22%. Businesses also pay income tax, with a flat rate of 21% since the Tax Cuts and Jobs Act of 2017. This change significantly reduced corporate tax rates compared to previous years, where the top rate was 35%.

Another significant tax is the payroll tax, which funds Social Security and Medicare programs. Employees and employers each contribute 6.2% and 1.45%, respectively, for Social Security, up to a certain wage limit $147,000 in 2024. For Medicare, the contribution is 1.45% each, with no wage cap. Self-employed individuals must pay both the employee and employer portions of these taxes, totaling 15.3%.

Sales taxes are another form of federal taxation, though they are primarily levied by state and local governments. However, the federal government does impose excise taxes on specific goods like gasoline, alcohol, and tobacco. These excise taxes vary based on the product and are intended to discourage consumption or generate revenue for particular programs. For instance, the federal excise tax on gasoline is approximately 18.4 cents per gallon.

Estate and gift taxes are less common but still important components of the federal tax system. These taxes apply to the transfer of wealth during an individual’s lifetime or after their death. The estate tax is levied on the total value of an individual’s assets above a certain threshold, currently set at $12.06 million for individuals in 2024. The gift tax applies to transfers of property or money while the donor is still alive, with an annual exclusion of $16,000 per recipient. Both taxes have a maximum rate of 40%.

Capital gains taxes are another category that affects investors. These taxes apply when an asset, such as stocks or real estate, is sold for a profit. The rates depend on the taxpayer’s income and the length of time the asset was held. Short-term capital gains, for assets held less than a year, are taxed at ordinary income rates. Long-term gains, however, receive preferential treatment, with rates of 0%, 15%, or 20% depending on the taxpayer’s income level.

The federal tax system also includes various deductions and credits aimed at reducing taxable income or providing financial relief. Common deductions include mortgage interest, charitable contributions, and state and local taxes. Tax credits, such as the Earned Income Tax Credit EITC and Child Tax Credit, directly reduce the amount of tax owed. These provisions help ensure fairness and address specific societal needs.

In recent years, tax reform has been a topic of discussion in Washington D.C. In December 2017, Congress passed the Tax Cuts and Jobs Act, which made significant changes to the federal tax code. Among other things, this act temporarily increased the standard deduction, lowered individual income tax rates, and eliminated personal exemptions. While many welcomed these changes, some experts expressed concerns about the long-term fiscal impact and potential loss of revenue.

Overall, the U.S. federal tax system is a vital mechanism for funding national priorities. Its structure reflects a balance between raising sufficient revenue and promoting economic growth. As the economy evolves, so too will the tax landscape, requiring ongoing adjustments to meet changing needs and goals.