Overview of Personal Taxes in the U.S.

1. Federal Income Tax:

   • Administered by the Internal Revenue Service (IRS), it’s the largest source of federal revenue.
   • Progressive system: Higher income faces higher tax rates, ranging from 10% to 37% for 2025.
   • Applies to U.S. citizens, residents, and nonresident aliens (on U.S.-sourced income).
   • Taxable income is calculated as: Adjusted Gross Income (AGI) (total income minus above-the-line deductions) minus standard/itemized deductions and exemptions.

2. Social Security and Medicare Taxes (FICA):

   • Social Security: 6.2% on wages up to $168,600 in 2025, matched by employers (12.4% for self-employed).
   • Medicare: 1.45% on all wages, matched by employers (2.9% for self-employed), plus 0.9% for high earners (over $200,000 single/$250,000 joint).
   • Deducted from paychecks, funding retirement and healthcare benefits.

3. State Income Tax:

   • 41 states and Washington, D.C., impose personal income taxes, with rates varying from 1% to 13.3%.
   • Nine states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire) have no state income tax, though some tax specific income (e.g., dividends in New Hampshire).
   • Some states use progressive rates (like federal), others have flat rates, and deductions/exemptions vary.

4. Local Income Tax:

   • Imposed by some cities or counties (e.g., New York City, Philadelphia), typically 1–4%.
   • Not all areas have local taxes; depends on residence/work location.

5. Other Taxes:

   • Capital Gains Tax: Federal rates of 0%, 15%, or 20% on profits from selling assets (e.g., stocks) held over a year; short-term gains are taxed as ordinary income. States may apply their own rates.
   • Sales Tax: No federal sales tax, but 45 states and local jurisdictions impose rates (2.9%–12%). Exemptions vary (e.g., food, medicine).
   • Property Tax: Local taxes on real estate, typically 0.5%–2% of property value annually.
   • Net Investment Income Tax (NIIT): 3.8% federal tax on investment income for high earners (over $200,000 single/$250,000 joint).

6. Tax Filing:

   • Annual federal and state tax returns are due by April 15 (for prior year’s income), extendable to October 15.
   • Employees file Form W-4 with employers to adjust withholdings.
   • Common software: TurboTax, H&R Block, TaxSlayer.

7. Credits and Deductions:

   • Credits: Reduce tax owed dollar-for-dollar (e.g., Child Tax Credit, Earned Income Tax Credit).
   • Deductions: Reduce taxable income (e.g., standard deduction of $15,000 single/$30,000 joint in 2025, or itemized deductions like mortgage interest, state taxes up to $10,000).

8. Special Considerations for Newcomers:

   • Nonresident Aliens: Taxed only on U.S.-sourced income, often at a flat 30% unless reduced by tax treaties. May not claim standard deductions or joint filing rates.
   • Residents/Citizens: Taxed on worldwide income, with credits for foreign taxes paid.
   • No Credit History: Tax filing doesn’t require a credit history, but you need an SSN or Individual Taxpayer Identification Number (ITIN) for non-SSN-eligible individuals (e.g., certain visa holders).

Federal Taxation Framework (2025)

Table 1: 2025 Federal Income Tax Brackets and Rates

Notes:

• Standard Deduction (2025): $15,000 (single), $30,000 (joint), $22,500 (head of household), $15,000 (separate). 

• Alternative Minimum Tax (AMT): Applies at 26% or 28% to high earners (threshold: $232,600 single/$116,300 separate in 2024, adjusted for 2025). 

• Capital Gains/Qualified Dividends: 0% ($0–$47,025 single), 15% ($47,026–$518,900), 20% (over $518,900). 

• Net Investment Income Tax: 3.8% on investment income for high earners (over $200,000 single/$250,000 joint). 

State Income Tax Rates (2025)

Notes:

• No Income Tax States: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire (dividends/interest only until 2027).