US Federal Tax System

The United States federal tax system is administered by the Internal Revenue Service (IRS) under the Internal Revenue Code (IRC). This slice covers federal rules; state taxation adds another layer with 50 different systems, some mirroring federal rules, others diverging significantly.

Tax Administration

The IRS is the federal tax authority responsible for collecting taxes and enforcing tax law. Key IRS characteristics:

Self-assessment system: Taxpayers calculate and report their own liability. The IRS processes returns, issues refunds, and may later audit or adjust returns. Filing a return doesn't mean the IRS has accepted it as correct.

Statute of limitations: Generally three years from filing (or due date if later) for the IRS to assess additional tax. Extended to six years for substantial understatements (25%+ omission). No limit for fraud or failure to file.

Penalties and interest: Failure-to-file penalty (5% per month, up to 25%), failure-to-pay penalty (0.5% per month), and accuracy-related penalties (20% for negligence or substantial understatement). Interest compounds daily on underpayments.

Filing Status

US tax law defines five filing statuses that determine rates, standard deduction amounts, and eligibility for various provisions:

Single: Unmarried individuals without dependents qualifying for other statuses.

Married Filing Jointly (MFJ): Married couples combining income and deductions. Generally most favorable rates but creates joint liability.

Married Filing Separately (MFS): Married couples filing separate returns. Higher rates, limited credits, but separates liability. Required in some situations (student loan repayment, estranged spouse).

Head of Household (HOH): Unmarried taxpayers maintaining a home for qualifying dependents. Better rates than Single but stricter requirements than many realize.

Qualifying Surviving Spouse: Available for two years after spouse's death for those with dependent children. Allows MFJ rates.

Marital status is determined on December 31. The test is legal marriage, not cohabitation.

Key Tax Forms

Form 1040: The main individual income tax return. All individuals file some version of 1040.

Schedule C: Sole proprietor business income and expenses. Profit flows to 1040 and is subject to both income tax and self-employment tax.

Schedule E: Rental income, partnership/S corp pass-through income, estate and trust income. Different treatment than Schedule C—generally not subject to self-employment tax.

Schedule D: Capital gains and losses. Works with Form 8949 for detailed transaction reporting.

Form W-2: Employer-provided wage statement. Shows wages, withholding, and benefits.

Form 1099 series: Information returns for various income types (1099-INT interest, 1099-DIV dividends, 1099-NEC nonemployee compensation, 1099-B brokerage transactions, 1099-K payment card transactions).

Form W-4: Employee withholding election. Updated in 2020 to remove allowances in favor of dollar amounts.

Employment Taxes

US employment taxes include multiple components beyond income tax:

Social Security tax: Applies to wages up to an annual limit (indexed for inflation). Split between employer and employee. Self-employed pay both halves via self-employment tax.

Medicare tax: Applies to all wages with no cap. Additional Medicare tax applies to wages above threshold amounts.

Self-employment tax: Self-employed individuals pay the equivalent of both employer and employee portions of Social Security and Medicare. Calculated on Schedule SE. Half is deductible in calculating AGI.

Federal Unemployment Tax (FUTA): Paid by employers only on first portion of each employee's wages. Funds unemployment insurance system.

Key Concepts Specific to US

Adjusted Gross Income (AGI): Gross income minus specific "above-the-line" deductions (retirement contributions, student loan interest, self-employment tax deduction, HSA contributions). AGI is the basis for many calculations and limitations.

Modified Adjusted Gross Income (MAGI): AGI with certain items added back. Different MAGI calculations apply to different provisions—there is no single MAGI definition.

Standard deduction versus itemizing: Taxpayers choose between a flat standard deduction or itemizing specific deductions (state/local taxes with cap, mortgage interest, charitable contributions, medical expenses above threshold). Most taxpayers take the standard deduction.

Alternative Minimum Tax (AMT): Parallel tax system with fewer deductions and different rates. Taxpayers pay the higher of regular tax or AMT. Primarily affects high-income taxpayers with large state tax or incentive stock options.

Retirement Accounts

US tax law provides various tax-advantaged retirement vehicles:

Traditional IRA/401(k): Contributions may be deductible (reducing current taxable income), growth is tax-deferred, distributions are taxed as ordinary income. Required minimum distributions begin at specified ages.

Roth IRA/401(k): Contributions are not deductible (after-tax), but qualified distributions are entirely tax-free. No required minimum distributions for Roth IRAs during owner's lifetime.

SEP-IRA and Solo 401(k): Higher contribution limits for self-employed individuals. Employer contributions from business, employee contributions from individual.

Contribution limits, income limits for deductibility/eligibility, and early withdrawal penalties vary by account type and are adjusted annually.

Common US-Specific Situations

Qualified Business Income (QBI) deduction: Pass-through business owners may deduct up to 20% of qualified business income. Complex limitations based on income, business type, and W-2 wages paid.

Child Tax Credit: Credit for qualifying children. Amount, refundability, and phase-out thresholds change frequently with legislation.

Earned Income Tax Credit (EITC): Refundable credit for lower-income workers. Amount depends on earned income, filing status, and number of qualifying children. Significant audit risk area.

State and Local Tax (SALT) deduction cap: Itemized deduction for state/local income and property taxes limited to $10,000 ($5,000 MFS). Major impact in high-tax states.

Net Investment Income Tax (NIIT): 3.8% tax on investment income for taxpayers above threshold amounts. Applies to interest, dividends, capital gains, rental income, and passive business income.

Timing and Deadlines

Tax year: Calendar year (January 1 - December 31) for most individuals. Some businesses may use fiscal years.

Filing deadline: April 15 for individuals (or next business day if weekend/holiday). Automatic six-month extension available but extends filing deadline only, not payment deadline.

Estimated tax due dates: April 15, June 15, September 15, January 15 of following year. Safe harbor: pay 100% of prior year liability (110% for higher incomes) or 90% of current year liability.

Amended returns: Form 1040-X, generally within three years of original filing or two years of payment, whichever is later.

State Tax Considerations

State income taxes vary dramatically. Some states have no income tax; others have rates exceeding 10%. Key state considerations:

Residency rules differ from federal. Part-year and dual residency situations require careful analysis.

Conformity to federal rules varies. Some states use federal AGI as starting point; others require separate calculations.

Nexus rules determine when out-of-state income is taxable. Working remotely can create unexpected state tax obligations.

Credits for taxes paid to other states help prevent double taxation but may not provide complete relief.

For state-specific guidance, consult individual state tax authorities or professionals familiar with those jurisdictions.