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Understanding the fundamentals of federal and state taxation is essential for individuals and businesses. This overview provides a clear explanation of how taxes are structured and applied in the United States.
Federal Taxation
Federal taxes are collected by the federal government to fund national programs and services. The primary types include income tax, payroll tax, and corporate tax. Income tax is based on earnings and is progressive, meaning higher income levels are taxed at higher rates.
Employers withhold payroll taxes from employees’ wages to cover Social Security, Medicare, and unemployment insurance. Businesses pay corporate taxes on their profits, which are also subject to specific deductions and credits.
State Taxation
State governments impose taxes to fund local services such as education, transportation, and public safety. State income taxes vary by state, with some states having a flat rate and others using a progressive system.
In addition to income taxes, states may levy sales taxes, property taxes, and excise taxes. Sales taxes are applied to goods and services purchased within the state, while property taxes are based on real estate values.
Tax Filing and Compliance
Taxpayers must file annual returns with the IRS and relevant state agencies. Accurate record-keeping and understanding applicable deductions and credits are important for compliance and minimizing liabilities.
- Maintain detailed financial records
- Understand applicable tax laws
- Meet filing deadlines
- Utilize available deductions and credits