Citizens of every country pay tax on the income they earn. In the U.S., the federal government, the state governments and even the local governments impose tax on the income of individuals and corporations and also on the undistributed income of trusts and estates.
According to income tax law, no tax is imposed on partnerships. But partners have to pay a tax on their partnership income.
U.S. citizens have to pay tax on their entire income, including the income earned outside the U.S. Non U.S. citizens residing in the United States have to pay tax only on the income earned in that country.
The tax law in the United States allows individual income tax payers to choose the tax year. Most of them follow the calendar year.
U.S. citizens must assess their own income tax and file their tax returns. Generally, April 15 is the due date for filing income tax returns for the preceding year.
Also, they are required to pay income tax in advance based on their income estimates.
Taxable income is calculated by subtracting the allowed deductions from the total income or gross income. Salaries, pension amounts, fees earned, sales receipts, gain on property sale, and rent, interest and dividend received are some of the components of gross income. The income tax law allows various deductions. For example, businesses can deduct business expenses from their gross income. Individuals can deduct personal allowances as well as specific personal expenses like interest on home loans and charity contributions. While capital gains are fully taxed, capital losses can be deducted from the taxable income only to the extent of capital gains.
Under the income tax law, both the federal and state governments provide tax credits for income tax:
Child credit: A credit of $1000 is awarded for each qualifying child.
Child and dependent care credit: The upper limit of this credit is $6000. It is not applicable for incomes above a certain amount.
Earned income tax credit: This credit is granted to individuals who earn a low income and is calculated taking into consideration child credits if any. This credit is also not applicable for income above a certain amount.
Credit for the elderly and disabled: This is a flat credit of $1125. It is a non refundable credit.
Businesses – individuals, partnerships and corporations – are also eligible for certain tax credits under the income tax law.