Taxing Your Profits – How Income Tax Works in the United States

Tax. It sounds like a nightmare to most people in the United States, especially those who have no courage or discipline to delve into what many consider a very confusing system. Surely enough, the system tries to present itself as being rather progressive and easy to understand but fails to do so. Tax is very important and all the bad stories of people who failed to do their tax right or on time, or even avoiding to pay tax, are sort of true. Those who avoid paying tax shall find the wrath of the IRS to be swift and merciless. Fines are the best thing that can happen if one makes tax frauds.

In order to understand how taxation works in the United States, we have to dive a bit deeper.

Taxation in the United States

People think that buying items is cheap in the United States, clothes, food, technology especially. They are indeed right, at least until the end of the year starts approaching and the United States citizens realize that they have to do their taxes.

In Europe and most of the world, everything you buy is already taxed to start with, so doing taxes at the end of the year is unnecessary. In the United States, however, the responsibility lies on every adult to handle their own taxes, by reporting and documenting every purchase and income.

When talking about yearly income, people under 9,000 dollars would have to pay a 10% tax on their income. Someone earning over 400,000 dollars would have to pay around 39%. When it comes to gambling, for example, there is a flat tax rate of 25%, on any of the winnings. Loses are also required to be reported at the end of the year. These are just some of the benefits of a progressive taxation system.

The system itself is progressive in some aspects but has regressions in others.

Deductions – Every Citizen’s Friend

Deductions are what make the other part of the taxation system, its regressiveness. People are entitled to having some things deducted from their taxes. There are limits to this, and those who do not know the limits or know where to start or stop, can submit a wrong tax return and end up having to pay fines.

But, do it right and you pay less money at the end of a year. Now, speaking of regressiveness, the percentage that one has to pay on their yearly income can be used to reimburse mortgages, if one can even purchase a property. The larger the percentage, the larger the reimbursement.

You would think that rich people pay more taxes, but rich people usually divide their income among different investments and pay far less, usually up to 20%.

Is the System Good or Bad?

Many people consider the system to be really bad and in need of reform. Others consider it a pretty understandable thing, one which can benefit you if you manage it properly.

Either way, one has to do their taxes at the end of a year, and whether they can do it alone is another reason why the tax system is criticized. People often rely on professional accountants to do their taxes for them, which is another expense, especially problematic for those with a lower income.

 

Taxation in the United States can be troublesome to those unwilling to learn about it, but that can be solved with professional help. On the other hand, those who take their time might even get more out of it, through deductions and other bonuses.