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How do taxes work in the USA?

  • How Taxes Work in the USA
  • Taxes in the USA works on a income level or bracket system. All money you make in the USA is considered income. If you own real estate properties, the rent you receive is considered income. From the income, you are allowed to deduct all related expenses to that income. What’s left is called the Adjusted Gross Income (AGI) or Net Income. With this income we can then calculate the income tax that is owed to the IRS. Most taxpayers have other deductions or credits that can help further reduce their tax liability. In the examples below, we will not discuss credits and deductions.
  • Here are some common income types:
  • Employment Income – This is your standard W-2 and 1099 Independent Income
  • Capital Gains Income – This is the income you make on the sale of an asset for a gain
  • Dividend Income
  • Interest Income
  • If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside. You must pay any tax due by April 15 or interest will be charged starting from April 15.

Create an LLCCreate a CorpTax Returns in USA

  • The Income Tax Bracket System
  • As we said above, the USA Tax System works off income level brackets. The higher your income, the higher bracket you are in. In 2018, the Tax Reform Act changed the bracket system to the benefit of all tax payers. Below you will find the income tax brackets for individuals and companies. We’ll show you later how to calculate the income tax you owe based off the bracket you are in.
  • Individual Tax Bracket for 2023

  • Rate Individuals Married Filing Jointly
    10% Up to $11,600 Up to $23,200
    12% $11,600 to $47,150 $23,200 to $94,300
     22% $47,150 to $100,535 $94,300 to $201,050
    24% $100,535 to $191,950 $201,050 to $383,900
    32% $191,950 to $243,725 $383,900 to $487,450
    35% $243,725 to $609,350 $487,450 to $731,200
    37% over $609,350 over $731,200
  • C-Corporation Tax Bracket for 2023

  • Tax Reform eliminated the numerous tax brackets for corporation and imposed instead of 21% FLAT TAX RATE on C-corp income. This is a huge benefit for anybody that has a C-Corporation.
  • Pass-Through Income Tax

  • Pass-Through Entities, such as S-Corps and LLCs, will most likely utilize the individual tax bracket from above. This is, of course, of the owner of the pass through entity is an individual. The good news is that the IRS is allowing a 20% Deduction on your Individual Tax Return of all Pass-Through Income. There are some exceptions to this new law. So make sure you meet with a TaxLeaf Representative today to find out if this awesome deduction applies to you.

Create an LLCCreate a CorpTax Returns in USA

  • How To Calculate Tax Based off Brackets
  • Many people think that the tax bracket system is ABSOLUTE. Using the brackets above, this would mean that a Single Individual making $40,000 gross income would have a 22% Tax Rate. This is not the way our tax brackets work. The tax bracket system is PROGRESSIVE. This means you will utilize the tax rate for each level, then move to the next level.
  • Using the same example of $40,000 for a single tax payer, your tax due would be calculated as follows:
  • First Bracket Calculation: $9525 x 10% = $952 Tax
    Second Bracket Calculation: ($38,700-$9525) x 12% = $3501
    Third and Final Bracket Calculation: ($40,000-$38,700) x 22% = $286
    Your Total Tax is the sum of all the above calculations: (1st) $952 + (2nd) $3501 + (3rd) $286 = $4739
  • So if you divide the total income by the total tax, ($4739 % $40,000) you get a tax rate of 12%