Keith Mack
The US tax system is a complex network of federal, state, and local taxes. Federal taxes are administered by the Internal Revenue Service (IRS), which makes inflation-related adjustments to more than 60 tax provisions annually to keep income tax brackets, deductions, and other inputs in line with the changing cost of living. The US tax code increases marginal tax rates on taxable income as taxable income brackets rise, and there are seven federal tax rates for 2025, ranging from 10% to 37%. State and local income taxes are imposed in addition to federal income tax, and tax rates vary by state and locality. The US tax system has been criticised for its fairness, effectiveness, and adequacy, and there have been calls for changes to corporate tax laws and capital gains tax. With the dynamic nature of tax planning and potential changes ahead, individuals and businesses should stay informed about tax developments to optimise their financial plans.
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What You'll Learn
Tax laws and tax brackets
The US tax system is progressive, meaning that people with higher incomes are subject to higher federal tax rates, while those with lower incomes are subject to lower income tax rates. The government decides how much tax one owes by dividing their taxable income into chunks, or tax brackets, with each chunk being taxed at a corresponding rate. The federal income tax rates for 2024 and 2025 range from 10% to 37%, with seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Tax brackets are adjusted annually to account for inflation, with the IRS making inflation-related adjustments to over 60 tax provisions. These adjustments are made to income tax brackets, deductions, and other inputs to keep them in line with the changing cost of living. For instance, the 2025 standard deduction increased by $400 for single filers and $800 for joint filers, with those over 65 or who are blind being able to claim an additional standard deduction of $2,000 for single filers and $1,600 for joint filers.
The tax bracket thresholds also shifted in 2025 compared to 2024. For instance, a single filer with a taxable income of $50,000 in 2024 would pay 10% on the first $11,600, 12% on the income between $11,601 and $47,150, and 22% on the rest. In 2025, a single filer with a taxable income of $50,000 will pay a combination of 10%, 12%, and 22%. A key income threshold to watch for high-income filers is $197,300 for single filers and $394,600 for married couples filing jointly, which are the respective thresholds for moving from the 24% tax rate bracket to the higher 32% rate bracket. The top marginal income rate of 37% will apply to single filers with taxable incomes of $626,350 and above, and for married couples filing jointly with taxable incomes above $751,600.
Additionally, long-term capital gains face different brackets and rates than ordinary income, and these brackets were adjusted slightly higher for 2025. People with lower incomes may pay no long-term capital gains tax when selling appreciated assets that they have held for over a year.
At the federal level, there are three tax administrations: the Internal Revenue Service, the Alcohol and Tobacco Tax and Trade Bureau (TTB), and the US Customs and Border Protection (CBP). State and local income taxes are imposed in addition to federal income tax, with 43 states and many localities imposing an income tax on individuals, and 47 states and many localities imposing a tax on corporate income.
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Tax planning strategies
Tax planning is the analysis and arrangement of a person's financial situation to maximise tax breaks and minimise tax liabilities legally and efficiently. It is an essential part of an individual investor's financial plan. Here are some tax planning strategies that can help you keep your financial plan on track:
Retirement Accounts
You can make tax-deductible contributions to a 401(k) plan, 403(b) plan, or traditional IRA. The amount you can contribute each year increases if you're 50 or older. These contributions reduce your overall income, and you pay taxes when you make withdrawals in retirement.
Health Savings Accounts (HSAs)
HSAs give you the triple tax benefit of tax-deductible contributions, tax-free earnings, and tax-free withdrawals for qualified medical expenses.
Flexible Spending Accounts (FSAs) and Dependent Care FSAs (DCFSA)
FSAs and DCFSAs allow you to bypass taxes to save for healthcare costs and dependent care, respectively.
529 Plans
A 529 plan allows you to make contributions while enjoying tax-free earnings and withdrawals for approved educational expenses.
Roth IRA
Roth IRAs are not subject to income taxes at the time of withdrawal in retirement. You pay taxes upfront, so your contributions are not tax-deductible, but earnings on your investments grow tax-free.
Itemizing vs. Standard Deduction
Deciding whether to itemize or take the standard deduction is a significant part of tax planning. The standard deduction is a flat-dollar, no-questions-asked tax deduction, whereas itemizing involves claiming specific deductions that may add up to more than the standard deduction. Itemizing takes longer, and you must be able to prove you qualified for the deductions.
Tax Credits
Tax credits are better than tax deductions because they give you a dollar-for-dollar reduction in your tax bill.
State and Local Taxes
State income tax is allowed as a deduction when computing federal income, but it is capped at $10,000 per household. Additionally, property taxes are most commonly applied to real estate and business property, and the amount of tax is determined by the market value of the property.
Gifting
If gifting is part of your wealth plan, discuss your options with tax and financial professionals. They can help you make informed decisions and align your tax strategy with your financial plan.
Tax Treaties
If you are a foreign non-resident, you are taxed only on income from U.S. sources or a U.S. business. Tax treaties may further reduce the tax rate.
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State and local taxes
Income Tax
Forty-three states and many localities in the US impose an income tax on individuals, while 47 states and many localities impose a tax on corporate income. The amount of state and local income tax one pays depends on their income level and the tax rate of their state or locality. The federal government allows a deduction for state and local income taxes, but this is capped at $10,000 per household since the 2017 tax law.
Property Tax
Property taxes are commonly applied to real estate and business property. The amount of property tax owed is determined by the property's market value, with most jurisdictions requiring periodic redeterminations of value. While the market value of a recently sold property is established by the sale, other properties' values must be estimated using techniques like comparable sales, depreciated cost, or an income approach. Property owners may also declare a value, which can be changed by the tax assessor.
Sales Tax
Retail sales taxes are a significant revenue source for most states and localities, accounting for 32% of state tax collections and 13% of local tax collections. Forty-five states collect statewide sales taxes, and consumers in 38 states also face local sales taxes. These local rates can be substantial and may even exceed state rates in some cases. Sales tax rates vary across states and localities, and certain goods, like groceries, may be exempt.
Other Taxes
In addition to income, property, and sales taxes, states and localities may impose other taxes, such as personal property taxes on items like cars, boats, recreational vehicles, and business machinery. Furthermore, certain types of receipts, like gifts and inheritances, and specific benefits, such as employer-provided health insurance, are typically excluded from taxable income.
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Corporate tax laws
Business entities may elect to be treated as corporations taxed at the entity and member levels or as "flow-through" entities taxed only at the member level. S Corporations, for example, have restrictions such as requiring all shareholders to be US citizens or resident individuals. Real estate investment trusts (REITs) are exempt from corporate income tax if certain conditions are met, such as distributing at least 90% of their income to shareholders and deriving income from real property.
In addition to income tax, corporations are subject to excise taxes on the purchase of certain goods or activities, such as gasoline or commercial highway usage. They may also be subject to documentary taxes, which vary by state and local jurisdiction. Federal tax rules also limit the deduction of interest expense paid by corporations to foreign shareholders, and certain states have further limitations on related-party payments.
The Inflation Reduction Act enacted a new corporate alternative minimum tax (CAMT) for tax years beginning after 2022, based on financial statement income. The CAMT is a 15% minimum tax on adjusted financial statement income (AFSI) for applicable corporations, generally those with average annual AFSI exceeding $1 billion. The IRA also introduced a corporate AMT foreign tax credit (FTC), reducing 15% of a taxpayer's AFSI to calculate the tentative minimum tax.
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Tax credits
The US tax code is notoriously complex, with federal, state, and local taxes to consider, as well as various credits and deductions. Tax credits and deductions can help lower an individual's or business's tax bill or increase their refund.
The federal government may grant tax credits to promote specific behaviours that benefit the economy, the environment, or other areas of interest. For example, tax credits are available for individuals who install solar panels for home use, or to help offset the costs of childcare, education, and adoption. Additionally, tax credits and deductions are available for individuals and businesses related to dependent care, healthcare, home expenses, and work-related expenses.
The IRS provides further details on tax credits and deductions, including the Earned Income Tax Credit, which is a refundable credit, and the Premium Tax Credit. It is important for individuals and businesses to stay informed about the various tax credits and deductions they may be eligible for, as they can have a significant impact on their financial situation.
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Frequently asked questions
Yes, US tax laws can be changed. The Constitution gives Congress the power to tax, and they typically enact federal tax law in the Internal Revenue Code (IRC).
The Tax Cuts and Jobs Act (TCJA) made several changes, including reducing income tax rates for individuals and increasing the standard deduction. The Trump Administration has also proposed additional tax provisions, such as a lower corporate tax rate for domestic manufacturers.
Changes to US tax laws can have significant effects on individuals and businesses. For example, adjustments to tax brackets, deductions, and retirement contributions can impact tax planning strategies and overall tax liabilities.
Yes, there have been challenges to the applicability of US tax laws, but courts have consistently rejected these arguments.
Yes, the Inflation Reduction Act of 2022 includes a climate piece that overhauls the federal tax code. It introduces a technology-neutral tax credit regime for power facilities with zero greenhouse gas emissions and reduces barriers to using these tax credits.
