United States Income Tax Rates
"Nothing is more certain than death and taxes," or so says an old joke, and the taxes most people have in mind are income taxes. There are other common taxes, such as the sales tax or the payroll FICA tax, but when people grumble about their taxes or politicians vow to make tax cuts, they almost always have the income tax in mind. This system of progressive and direct taxation and its poorly understood set of exemptions and deductions is easily the most prominent in America.
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Progressive Taxation
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The U.S. government imposes progressive income taxes on companies, corporations, decedents' estates, partnerships, private citizens and trusts. "Progressive" means that the more income you have, the higher your tax rate. The reason for this is that taking 33 percent of the income of a person making $20,000 a year is a much more severe blow to their standard of living than the same 33 percent would be from a person making $200,000 a year. This tax includes all gross income, except for things specifically excluded by law (such as health benefits). This amount is then adjusted by subtracting deductions (like interest on educational loans and alimony payments) to form taxable income.
Tax Rates
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As previously described, the Federal Income Tax is progressive, and works on an upwardly sliding scale. The 2008 schedule for a single person was: up to $8,025 (10 percent); up to $32,550 (15 percent); up to $78,850 (25 percent); up to $164,500 (28 percent); up to $357,700 (33 percent); over $357,700 (35 percent). These rates are variable, according to the law, and may either rise or decrease according to circumstances. For example, the 2008 tax rates were set by George W. Bush's 2001 and 2003 tax cuts, and are set to expire in 2010. In 1991, these rates were 31 percent ($49,301-plus); 28%($29,351 to $49,300); and 15 percent (up to $29,250).
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Capital Gains
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Short-term capital gains (returns on investments) are taxed as ordinary income. Long-term capital gains are covered by a separate income tax commonly, the Capital Gains Tax. Long-term in this case means that the investment asset was held for longer than one year and is taxed at a lower rate than the income tax. As with tax rates, the definition of short-term or long-term for capital gains is set by law and is frequently revised.
Alternative Minimum Tax
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The Alternative Minimum Tax (AMT) is a complicated tax provision meant to collect taxes from those with high incomes who would otherwise pay little or no income taxes due to the deductions and exemptions they have claimed. There is an AMT for private individuals and households, and a separate AMT for corporations. However, as the AMT has not been adjusted for inflation after enactment, and was modified by Ronald Reagan to go after home owner's deductions in 1986, more and more Americans are being required to pay taxes under its provisions.
Deductions and Real Taxes
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During the Second World War, the top income tax rate reached 94 percent. However, that does not mean that the richest people in America were paying out 94 percent of their income in taxes. This is because of deductions. Income tax rates taken out of the context of income tax deductions and exemptions are actually quite meaningless. In theory, with the right mix of income sources (long-term capital gains, for example), exemptions and deductions, it is quite possible for a millionaire to avoid paying any income taxes.
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