Taxes in the USA: Understanding the Local Tax System

The tax legislation of the United States is exceptionally complex and multi-layered, presenting a real challenge even for experienced businessmen and financiers. Unlike most countries with unified tax rates, the American system is built on the principle of separation of powers between different levels of government, creating unique conditions for taxpayers. This material will detail all the most important elements of this system - from the principles of taxing citizens' income to the specifics of corporate taxation and the system of tax incentives.

Three-Tier Model of Tax Administration

A fundamental feature of the American tax system is its division into three independent but interconnected components: national, regional, and municipal. At the federal level, tax collection is handled by the Internal Revenue Service (IRS), which controls revenues from major types of fiscal payments, including taxes on personal income, corporate profits, and social contributions.

At the level of individual states, the situation differs radically. In regions like Texas, Florida, Nevada, South Dakota, and Washington, there is completely no personal income taxation at the regional level. Meanwhile, in California, a progressive scale with a peak rate of 13.3% is applied, and in New York, the maximum regional tax reaches 10.9% of income.

Municipalities complement this picture with their own fiscal requirements, which may include additional surcharges to regional taxes, property levies, special district payments, and other local obligations. The highest burden is observed in metropolitan areas, where the total tax burden can significantly exceed the national average.

Principles of Taxation of Citizens' Income

The American system of taxing population income is built on a progressive basis - the amount of tax payments increases proportionally to the growth of the taxpayer's wealth. For permanent residents (US citizens and green card holders), the principle of worldwide taxation applies, while non-residents are required to pay taxes only on income derived from American sources.

Key characteristics of the system:

• Progressive tax scale (rate increases with income growth)
• Different rules for residents and non-residents
• Multi-stage system for calculating the tax base

Taxpayer status:

For residents (US citizens and green card holders):

• Tax on all worldwide income
• Full access to tax deductions and credits

For non-residents:

• Tax only on income from US sources
• Limited opportunities for tax deductions

Federal tax rates (2024):

• 10% - for income up to $11,600
• 12% - $11,601-$47,150
• 22% - $47,151-$100,525
• 24% - $100,526-$191,950
• 32% - $191,951-$243,725
• 35% - $243,726-$609,350
• 37% - over $609,350

Features for non-residents:

Passive income (dividends, interest, royalties):

• Standard rate 30%
• May be reduced by tax treaties

Active income (salary, business income):

• Progressive rates same as residents
• Special limitations and calculation rules

Important nuances:

• Each rate applies only to the portion of income within the corresponding range
• State taxes are added to federal taxes (if applicable in a particular state)
• Possibility to reduce taxable base through deductions

Corporate Taxation

Since 2018, the federal corporate income tax rate has been 21%. This flat rate replaced the previous progressive scale with a maximum rate of 35%. However, many states levy an additional corporate tax, which can significantly increase the overall tax burden on businesses.

Corporations can reduce their taxable base through various deductions. These include expenses for employee salaries, rent, and purchase of equipment and materials. Special attention should be paid to the Research and Development Tax Credit (R&D Tax Credit), which provides significant benefits to companies engaged in innovative activities.

Features of Sales Tax in the USA

Unlike European practice with a unified VAT, the American indirect taxation system has a completely different structure. In the US, there is no federal value-added tax; instead, 45 states and the District of Columbia apply a sales tax system. This tax fundamentally differs from VAT in that it is levied only at the final consumption stage, not at each stage of the production chain.

Geographical differences in rates for this tax are striking in their diversity. Take California as an example: the base rate here is 7.25%, but when local surcharges are added, in some cities like San Francisco or Los Angeles, the total rate can reach 10.25%. In New York, the situation is somewhat different - the average effective rate fluctuates around 8.52%, while in Chicago it reaches 10.25%, making it one of the most "expensive" cities in terms of purchase taxation.

Of particular interest are five states that have completely abolished this type of tax: Delaware, Montana, New Hampshire, and Oregon do not charge sales tax at all, while in Alaska, although the state does not impose a general sales tax, local authorities have the right to introduce their own municipal levies.

System of Tax Incentives and Preferences

American tax legislation provides a wide arsenal of tools for reducing fiscal burden. For ordinary taxpayers, the three most significant mechanisms are:

• First, the standard tax deduction, which in 2024 is set at $14,600 for single citizens and $29,200 for married couples filing jointly.
• Second, an important benefit is the possibility of deducting mortgage interest for housing (with a limit of $750,000 of the principal loan amount).
• Third, family taxpayers can use the child tax credit, reaching $2,000 per child.

For businesses, there are even more interesting opportunities. Companies choosing S-Corporation or LLC forms gain access to the pass-through taxation system, where profits are accounted not at the enterprise level but transferred directly to the owners. Particularly advantageous is the Qualified Business Income (QBI) deduction, allowing entrepreneurs to reduce their taxable base by 20% of income, which in some cases provides colossal savings.

Reporting Requirements and IRS Control

Deadlines for submitting tax documents in the US are strictly regulated. Individuals must file Form 1040 no later than April 15 of the year following the reporting period. Corporations (C-Corp) must meet the same deadline for filing Form 1120, while partnerships and LLCs (Form 1065) have slightly less time - until March 15.

A strict system of penalty sanctions is provided for violations of deadlines. The minimum penalty for late filing is 5% of the unpaid amount for each month of delay (but not more than 25% of the total debt). Additionally, interest is charged for each day of payment delay, which can significantly increase the final debt amount.

The US Tax Administration (IRS) has exceptional powers for control and enforcement. In cases of serious violations, taxpayers may face not only large financial fines but also criminal prosecution for tax evasion.

Optimization of Tax Burden

Several legal methods can be used to minimize tax liabilities in the US. First, it is worth exploring the possibility of applying tax treaties that the US has concluded with more than 60 countries. These agreements help avoid double taxation and may provide reduced rates for certain types of income.

Choosing the optimal legal form for business also plays a key role in tax planning. LLCs and S-Corps often prove more beneficial for small businesses, while C-Corps may be preferable for companies planning to attract investments or go public.

Utilizing all available deductions and credits is another important aspect of tax optimization. Special attention should be paid to the Foreign Tax Credit, which allows crediting taxes paid in another country against US tax liabilities.

The US tax system, for all its complexity, provides many opportunities for legal optimization of the tax burden. Key factors for successful tax planning include understanding the tax structure, timely filing of returns, and competent use of all available benefits and deductions. For residents and non-residents, individuals and companies, rules can differ significantly, so in complex cases, it is always recommended to consult with professional tax specialists.