Most people can name two or three taxes they pay and are surprised by how many they actually pay once the list is laid out.
The layers matter because comparing one tax between two places is how people reach the wrong conclusion about where they are better off. A state collecting nothing on income may collect considerably more through property and consumption.
This covers the federal, state and local layers, who bears each one in practice as opposed to who is legally obliged to pay it, and the difference between taxes that rise with income, fall with it, or stay flat.
Introduction: The US Tax System
The United States has a multi-layered tax system with federal, state, and local taxes. Understanding each type helps you plan, comply, and minimize your total tax burden legally. Here is a complete overview of every major category.
Comparing one tax between two places is how people reach the wrong conclusion about where they are better off. A state collecting nothing on income may collect considerably more through property and consumption. The mix is what decides the total, not any single rate.
Anu Gupta, CA, EA, B.Tech · LinkedInFederal Taxes
1. Federal Income Tax
The largest source of federal revenue. Imposed on wages, salaries, self-employment income, investment income, and most other income.
- Progressive: rates rise from 10% to 37% as income increases
- Rates: 10%, 12%, 22%, 24%, 32%, 35%, 37% (2025 brackets)
- Standard deduction: $14,600 single / $29,200 MFJ (2024)
- Filed annually via Form 1040
2. Payroll Taxes (FICA)
Payroll taxes fund Social Security and Medicare. Shared between employer and employee.
- Social Security: 6.2% employee + 6.2% employer = 12.4% total
- Social Security wage base 2025: $176,100 (no SS tax on wages above this)
- Medicare: 1.45% employee + 1.45% employer = 2.9% total
- Additional Medicare Tax: 0.9% on wages over $200,000 (single) / $250,000 (MFJ), employee only
- No wage ceiling for Medicare
3. Self-Employment Tax (SE Tax)
Self-employed individuals pay both the employee and employer share of FICA.
- Total SE tax rate: 15.3% (12.4% SS + 2.9% Medicare)
- Applied to 92.35% of net self-employment income
- Half of SE tax is deductible above-the-line on Form 1040
- Subject to the same wage base and additional Medicare thresholds as FICA
4. Corporate Income Tax
- Flat 21% federal rate on C-corporation taxable income (since 2018 TCJA)
- C-corps file Form 1120
- S-corps and partnerships are pass-through entities, no corporate-level federal income tax
- Alternative Minimum Tax (AMT) applies to certain large corporations
5. Capital Gains Tax
Tax on profits from selling capital assets (stocks, real estate, businesses).
- Short-term (held 1 year or less): taxed as ordinary income (up to 37%)
- Long-term (held more than 1 year): 0%, 15%, or 20% depending on taxable income
- Net Investment Income Tax (NIIT): additional 3.8% on investment income for high earners
- Primary residence exclusion: $250,000 single / $500,000 MFJ
6. Estate and Gift Taxes
- Federal estate tax: 40% on estates above the exclusion amount
- 2025 exclusion: $13.61M per individual
- Annual gift exclusion: $18,000 per recipient per year (2024)
- Gifts above annual exclusion reduce lifetime exemption
7. Excise Taxes
- Taxes on specific goods and services: gasoline, tobacco, alcohol, firearms, airline tickets
- Often embedded in the price (e.g., federal gas tax: 18.4 cents/gallon)
- Businesses in excise industries must file Form 720
8. Customs and Import Duties
- Taxes on imported goods at the US border
- Rates vary widely by product category and country of origin
- Administered by Customs and Border Protection (CBP)
State Taxes
State Income Tax
- 43 states (plus DC) levy a state income tax
- 7 states with no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Wyoming
- Rates range from flat (e.g., Colorado: 4.4%) to progressive (e.g., California: up to 13.3%)
- Most states conform to federal definitions of income with modifications
State Sales Tax
- 45 states plus DC levy a state sales tax
- Rates range from 2.9% (Colorado) to 7.25% (California state rate)
- Combined with local taxes, top rates exceed 10% in some jurisdictions
- 5 states with no sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon
State Property Tax
- Primarily administered at the local level, though state-level property taxes exist in some states
- Funds schools, local government services
- Effective rates vary: 0.28% (Hawaii) to 2.23% (New Jersey)
Inheritance Tax
- Only 6 states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania
- Distinct from estate tax: applies to the beneficiary, not the estate
- Rates and exemptions vary; spouses and children are often exempt
Local Taxes
- Property tax: the dominant local revenue source
- Local income tax: certain cities (New York City, Philadelphia, Detroit) impose local income taxes
- Local sales tax: add-on to state sales tax
- Business license fees and gross receipts taxes in some jurisdictions
Summary Table: Major US Taxes
| Tax Type | Key Rate / Notes |
|---|---|
| Federal Income Tax | 10%-37% (progressive) |
| Social Security (FICA) | 12.4% total (6.2% each); wage base applies |
| Medicare (FICA) | 2.9% total (1.45% each) + 0.9% for high earners |
| Self-Employment Tax | 15.3% on 92.35% of net SE income |
| Corporate Income Tax | 21% flat rate (C-corps) |
| Long-Term Capital Gains | 0%, 15%, or 20% |
| Federal Estate Tax | 40% above $13.61M exclusion (2025) |
| State Income Tax | 0%-13.3% depending on state |
| State Sales Tax | 0%-7.25% (plus local) |
| Property Tax | Varies; avg. ~1% of assessed value |
Tax Incidence vs. Legal Obligation
Legal obligation (who writes the check) differs from economic incidence (who bears the cost). For example, employers write payroll tax checks, but economists generally believe workers bear most of the burden through lower wages.
Progressive vs. Regressive vs. Flat Taxes
| Type | Definition / Example |
|---|---|
| Progressive | Higher rates for higher income. Federal income tax. |
| Regressive | Lower-income earners pay higher percentage of income. Sales tax. |
| Flat (Proportional) | Same rate for all. Corporate income tax at 21%. |
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Frequently Asked Questions
Which is the biggest tax for most Americans?
Federal income tax and payroll (FICA) taxes combined represent the largest burden for most wage earners.
Are Social Security benefits taxable?
Yes, up to 85% of SS benefits may be taxable depending on combined income.
Do I pay state income tax where I live or work?
Usually both, with credits to avoid true double taxation. Rules vary by state.
What is the difference between tax avoidance and tax evasion?
Avoidance is legal reduction of taxes through legitimate planning. Evasion is illegal non-reporting or fraud.
Why does the total burden differ so much between two similar households?
Because the mix matters more than any single rate. Two households with the same income can face very different totals depending on where they live, whether they own property, how much of their income is from employment, and what they spend it on. A state with no income tax may collect more through property and consumption. Comparing one tax in isolation is the most common way people reach the wrong conclusion about where they are better off.
Written by
Anu Gupta, CA, EA, B.Tech
Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn
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