What kind of tax system does the united states use?

Question: What kind of tax system does the united states use?

The United States (US) has a progressive tax system, which is based on the fundamental principle of “Earn High Pay High” wherein if you earn high you have to pay higher taxes, keeping in mind the objective that someone with lower income should be subjected to pay lesser tax compared to higher-income earning person. 

The US levies tax on its citizens and residents on their worldwide income, as well as on non-resident aliens on their US-source income and income effectively connected with a US trade or business. The US federal government, as well as most state and local governments, impose taxes on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. 

The federal income tax rates for individuals vary from 10% to 37% of taxable income, depending on the filing status and the income level of the taxpayer. The rates are graduated, meaning that higher income is taxed at higher rates. The federal income tax also applies a lower rate of 20% on qualified dividends and long-term capital gains. 

In addition to the federal income tax, individuals may also be subject to the alternative minimum tax (AMT), which is a parallel tax system that ensures that high-income taxpayers pay a minimum amount of tax by limiting certain deductions and exemptions. The AMT rates are 26% and 28%, depending on the taxable income of the taxpayer. 

State and local income taxes vary widely by jurisdiction, ranging from 0% to 13.30% of income. Some states and localities also impose taxes on dividends, interest, and capital gains. State and local taxes are generally deductible for federal tax purposes, but the 2017 tax law imposed a $10,000 limit on the state and local tax (SALT) deduction, which raised the effective tax rate on medium and high earners in high tax states.  

The US tax system is complex and constantly changing due to new legislation, court decisions, and administrative guidance. Therefore, it is advisable to consult a tax professional before filing your tax returns or making any significant financial decisions that may have tax implications.

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