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BASIC STRUCTURE OF US INCOME TAXATION

United States of America collects major portion of its revenue via direct taxation of income of various entities.  Internal Revenue Code and the regulations thereunder provide the laws and rules about taxation of various entities. Over periods of years since its inception in 1914 the Internal Revenue Code has been amended and expanded into a law that is voluminous and very complicated.

Entities subject to U.S. Income Taxes

  • U.S. citizens and tax residents
  • U.S. Corporations, partnerships, and other business entities
  • Trusts and Estates
  • Non-resident aliens and foreign corporations with U.S. source income
  • Non- profit Organizations

Basic Principle of Income taxation for U.S. citizens and residents

  • U.S. income tax is based on the principle of "world income ". That means that  all the income of a U.S. citizen or resident no matter where he reside or where the income it is generated is subject to U.S. income taxes.
  • There are basic exemptions of certain amounts determined by US congress every year called standard deduction and personal exemption on which an individual does not pay income tax on.
  • An individual' s income is exempt from U.S. income taxes for amounts called standard deductions and personal exemption. These exempt amount vary upon many factors such as filing status, number of dependents etc. The exempt amount changes every year .Example: Married taxpayer filing jointly is subject to income taxes on income over $ 12,700 for 1999.
  • U.S. Income taxes are based on the principle of " Progressive Tax ". Tax payers with higher income pay tax at higher rates. These rates vary from 15% to 39.6%.
  • Corporations subject to U.S. income tax their net taxable income on a graduated rate structure of 15% to 35%.
  • Special rules apply to taxation of non-resident aliens and foreign corporations subject to U.S. income taxes. Many times the tax on such foreign entities are subject to provisions of tax treaty with foreign country.