The principal federal taxes for individuals are the individual income tax and the social security tax, which is imposed on wages of US employees regardless of where they are employed and on wages of non-US employees employed in the US. In addition to the regular income tax, individuals may be subject to the alternative minimum tax (AMT), which is triggered where an individual’s AMT liability exceeds that individual’s regular income tax liability.
Most states and some municipalities impose individual income tax. State and local income taxes generally follow the federal income tax in the way income is calculated but they may use apportionment in some cases.
The tax year for individuals is generally the calendar year, although a fiscal year or a 52-53-week year may be used in certain circumstances (if the taxpayer regularly keeps books on that basis). Individuals generally must file a tax return by 15 April after the end of the tax year. Extensions of time to file are available, but all tax payments must be made by 15 April. Penalties and interest can apply for failure to file or for late filing.
All US citizens and residents, including resident aliens, pay federal tax on their worldwide income and are allowed a foreign tax credit for foreign taxes paid or accrued. Aliens who have entered the US as permanent residents and who have not officially surrendered or lost the right to permanent US residency are taxed as US residents. Also taxed as residents are aliens who meet a 'substantial presence test', which requires physical presence in the US for (1) 31 days during the current calendar year and (2) a weighted number of 183 days over the course of the current calendar year and the two immediately preceding calendar years.
Non-resident aliens pay US personal taxes on all income from US sources 'effectively connected' with trade or business in the US on a net basis at graduated rates. Investment and other fixed or determinable income not 'effectively connected' with a US trade or business is taxed at a flat rate of 30% or a lower treaty rate, regardless of the amount.
Taxable Income and Rates
The tax burden on individuals is low in the US, compared with other industrialised nations. It is a progressive system on paper, though this is complicated by an intricate system of tax regulations. For higher-income individuals, the US tax code phases out personal exemptions and imposes a ceiling on itemised deductions.
In May 2001 the US Congress approved the Bush administration’s Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which cuts taxes by US$1.35 trn over a decade. Under the legislation, marginal rates were reduced across the board. All of these tax breaks, including the reduction in tax rates and repeal of the estate tax, are set to expire at the stroke of midnight on December 31st 2010. This expiration of the tax measures, or 'sunsetting', is an accounting device that allows the government to consider the costs for a ten-year window to comply with congressional budget parameters. Additional legislation, and revised fiscal calculations, will be required to make the reductions permanent.
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