Taxes in the United States vary not only by income or type of business, but also by state. Below we explain the types of taxes in the United States and what to pay attention to.
Table of Contents
- Types of Taxes in the United States – Basic Information
- Income Tax in the United States
- Taxes in the United States – Federal Income Tax
- Taxes in the United States – State Income Tax
- Taxes in the United States – Local Income Tax
- Taxes in the United States – Sales Tax
- Taxes in the United States – Why Do Individual States Have Their Own Taxes?
- Taxes in the United States – Summary
- FAQ About Taxes in the United States
Types of Taxes in the United States – Basic Information
The USA is a federation in which each state sets its own laws and taxes, but is subject to one common government. Both local and federal regulations therefore bind citizens.
The USA has a two-layer tax system:
- federal
- state (some states have a 0% rate) and tax collected by the local government.
The main difference between federal and state taxes is that state tax deductions are based on a taxpayer’s taxable income. At the federal level, there are three tax authorities:
- Internal Revenue Service (IRS)
- Alcohol and Tobacco Tax and Trade Bureau (TTB)
- Customs and Border Protection (CBP).
The organisation of state and local tax authorities differs significantly. Yet, there is at least one tax administration in each state.
The tax year in the USA runs from 1 January to 31 December, and the deadline for filing tax returns is 15 April. The main source of federal government funding is the income tax. It is a source of financing for the entire US government administration and army.
Income Tax in the United States
Income tax in the USA applies to both natural and legal persons. Its amount depends on the level of income and place of residence.
Income tax is imposed by:
- federal government
- State authorities
- local authorities.
Taxes in the United States – Federal Income Tax
Federal Income Tax is a fundamental element of the tax system in the USA. It concerns both the income of individuals and enterprises. It is collected regardless of the state of residence. At the federal level, progressive tax rates start at 10% and can go as high as 37%.
The Internal Revenue Service (IRS) determines the value of federal tax.
Key points that you should know:
- Every U.S. citizen must file an annual tax return.
- Companies using offshore solutions, e.g. in Delaware, often pay lower taxes.
Taxes in the United States – State Income Tax
In most of the United States, in addition to the federal income tax, there is also a State Tax. This tax is imposed only by certain state governments, usually based on taxable income.
| States with the Highest Income Tax | States without Income Tax | |
| California | 13,3% | Wyoming |
| Hawaii | 11% | Washington |
| New Jersey | 10,75% | Texas |
| Oregon | 9,9% | South Dakota |
| Minnesota | 9,85% | Nevada |
| District of Columbia | 8,95% | Florida |
| New York | 8,82% | Alaska |
| Vermont | 8,75% | Wyoming |
| Iowa | 8,53% | Washington |
| Wisconsin | 7,65% | |
Fun fact: Inthe USA, you can reduce income tax by using various types of deductions, e.g. for children, education or business expenses.
If you run a business in the USA, e.g. in Delaware, you can benefit from favourable tax laws.
Taxes in the United States – Local Income Tax
Another tax in the USA is the Local Income Tax, which is non-refundable. Local Tax funds are used, among others, for health care, local police and education.
What is important, the Local Tax covers taxes in the US such as The Property Tax or Real Estate Tax. They are calculated based on the value of the property. The U.S. Constitution allows individual states to set their own tax rates for fuel, property, and sales.
Taxes in the United States – Sales Tax
Sales tax in the USA is charged at the time of purchase. Unlike VAT in Europe, Sales Tax varies from state to state and is not always visible in the price of a product.
| States with the highest sales tax rates | States with the lowest sales tax rates | ||
| Tennessee | 9,55% | Alaska | 1,76% |
| Arkansas | 9,53% | Oregon | 0% |
| Louisiana | 9,52% | Delaware | 0% |
| Washington | 9,23% | Montana | 0% |
| Alabama | 9,22% | New Hampshire | 0% |
If you plan to shop in the USA, be sure to include this tax in your budget.
Taxes in the United States – Why Do Individual States Have Their Own Taxes?
Each of the 50 U.S. states can set its own tax regulations, which is why taxes in the United States vary depending on location.
For example:
- There is no State Tax in Texas, which attracts many entrepreneurs.
- New York Statehasone of the highest taxes in the country.
Taxes in the United States – Summary
Taxes in the United States may seem complicated. However, understanding them can bring significant benefits. It is worth focusing on the differences between federal, state, and local taxes. Another crucial aspect is using the available solutions to reduce tax liabilities.
Do you have questions about taxes in the United States? Contact us! Our team offers professional help and support in choosing the best tax solutions.
FAQ About Taxes in the United States
How are federal and state taxes different?
Federal taxes apply nationwide, while state taxes vary from state to state.
Do all States have state income taxes?
No, states like Texas and Florida do not have state income tax.
What is Sales Tax?
Sales Tax is a tax on goods and services, charged at the time of purchase.
Do you pay VAT in the USA?
No, Sales Tax replaces VAT in the USA, and its rates are set by individual states.
How to reduce income tax in the USA?
You can use deductions for education, family benefits, or business expenses.
Do foreigners have to pay taxes in the United States?
Yes, if they earn income in the USA.
What are the federal tax rates?
Rates range from 10% to 37%, depending on the value of income.
Does a company in the USA have to pay tax in its state?
It depends on the state. For example, companies in Delaware often use various tax benefits.
What are the deadlines for filing US tax returns?
Tax returns must be filed by 15 April each year.
Is the tax system in the USA different from the European one?
Yes, in the USA, the system is based on federal, state, and local taxes. VAT is replaced by Sales Tax.