In the United States, the Treasury Department reported, based on IRS data, the share of all federal taxes paid by taxpayers of various income levels.[5][6] The data shows the progressive structure of the U.S. federal tax system that reduces the tax incidence of people with smaller incomes.
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The top 0.1% of taxpayers by income pay 17.4% of all federal taxes (earning 9.1% of the income).
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The top 1% of taxpayers, gross income $328,049 or more, by income pay 36.9% of all federal taxes (earning 19% of the income).
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The top 5% of taxpayers, gross income $137,056 or more, pay 57.1% of all federal taxes (earning 33.4% of the income).
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The bottom 50%, gross income 30,122 or less, pay 3.3% of all individual income taxes (earning 13.4% of the income).
Inflation and tax brackets
Most tax laws are not accurately indexed to inflation. Either they ignore inflation completely, or they are indexed to the Consumer Price Index (CPI), which tends to overstate real inflation.[citation needed] In a progressive tax system, failure to index the brackets to inflation will eventually result in effective tax increases (if inflation is sustained), as inflation in wages will increase individual income and move individuals into higher tax brackets with higher percentage rate.
Tax withholding
Federal payroll taxes in the United States are primarily collected by employers on behalf of the Internal Revenue Service (IRS). The Federal income tax uses a system of direct withholding. Employers deduct part of a taxpayer's income directly from their payroll checks. Self-employed individuals make similar payments to the government. The amount of withholding is calculated based on an employee's expected annual salary and the employee's living situation (married or unmarried, number of dependents, other factors). Withholding does not perfectly calculate an individual's tax each year. The difference between the amount withheld and the actual tax is either paid to the government after the end of the year, or refunded by the government. Withholding is done on a honor system with penalties imposed on individuals who do not have enough withheld (or make enough estimated tax payments) during the year. The amounts deducted can be found in IRS Publication 15, also referred to as Circular E. For farmers, the rules are outlined in Publication 51 (Circular A). The IRS's Publication 505 can also be used to estimate the amount of tax withheld.
Some individuals choose to withhold more of their estimated tax burden than necessary, using the withholding and the refund check at the end of the year as a way of "forced savings" (at zero percent interest). Conversely, other individuals withhold as little as possible, using the rule that withholding need only be 100% of the previous year's tax liability, and thus pay a large amount on April 15. Most individuals fall somewhere in the middle.
Federal income tax
As of June 2001, the income tax forms the bulk of taxes collected by the U.S. government. Depending on individual income, the tax ranges from zero to 35% of one's taxable income.
The income tax is considered a progressive tax because the tax rate is higher as a percentage of the income for higher-income individuals. For an example showing the tax rates imposed by Congress in 1954 on the taxable income of unmarried individuals—with rates as high as 91%—see the chart at Internal Revenue Code of 1954.
Income tax is also imposed on the taxable income of most corporations and again on dividends paid to stockholders, although individuals usually pay a preferential tax rate on dividends; this is sometimes referred to as double taxation.
One fairly unique aspect of federal income tax in the United States, is that the U.S. uses citizenship in addition to residency in determining whether a person's income is subject to U.S. taxation. All U.S. citizens, including those who do not live in the United States, are subject to U.S. income tax on their worldwide income. There are provisions that exist to reduce double-taxation. Most other countries do not impose tax on their citizens who are not resident within their borders, unless they have income which is sourced in that country (and even then they only tax that specific income).
Tax deductions/credits
The U.S. government rewards certain behavior with tax deductions or tax credits. For example, amounts used to pay mortgage interest on a personal home may be deductible, if the taxpayer elects to itemize. Taxpayers who do not participate in an employer-sponsored pension plan may contribute up to $4,000 ($5,000 if age 50 or above) into an individual retirement account, and deduct that contribution from their gross income if they fall within certain income limits. The Earned Income Tax Credit benefits low- to moderate-income working families. It is also possible to receive a child and dependent care credit for amounts spent on daycare.
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