Tax systems vary widely among nations, and it is important for individuals and corporations to carefully study a new locale’s tax laws before earning income or doing business there.
Below, we will take a look at various tax situations in the United States. Generally speaking, the federal government levies income, corporate, and payroll taxes; the state levies income and sales taxes; and municipalities or other local governments mainly levy property taxes.5
Like many nations, the United States has a progressive income tax system, through which a higher percentage of tax revenues are collected from high-income individuals or corporations than from low-income individual earners. tools to manage money Taxes are applied through marginal tax rates.6
A variety of factors affect the marginal tax rate that a taxpayer will pay, including their filing status—married filing jointly, married filing separately, single, or head of household. Which status a person files can make a significant difference in how much they are taxed. The source of a taxpayer’s income also makes a difference in taxation.7 It’s important to learn the terminology of the different income types that may affect how income is taxed.
Capital gains taxes are of particular relevance for investors. Levied and enforced at the federal level, these are taxes on income from the sale of assets in which the sale price was higher than the purchasing price. These are taxed at both short- and long-term rates. Short-term capital gains (on assets sold one year or less after they were acquired) are taxed at the owner’s ordinary income tax rate, but long-term gains on assets held for more than a year are taxed at a lower capital gains rate, on the rationale that lower taxes will encourage high levels of capital investment.8 Tax records should be maintained to substantiate the length of ownership when both the assets were sold and the tax return was filed.