Unpacking the U.S. Tax System—Simply and Clearly

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It’s been a while since I last shared a post, but I’m excited to be back with something timely and insightful. Learning about the U.S. taxation system has been on my personal study list for quite some time, and I’m thrilled to finally dive into it. If you’ve ever wondered how the U.S. taxation system operates, this blog is for you.

Why Taxes Matter

Taxes are the lifeblood of a country’s governance. In the U.S., tax revenues support everything from national defense to public schooling, infrastructure, and healthcare. In 2024, the Internal Revenue Service (IRS) collected nearly $4.9 trillion, with individual income tax alone accounting for over $2.6 trillion—more than half of the country’s total revenue.

A Layered Tax Structure

The U.S. tax system functions at three levels: federal, state, and local. The IRS operates at the federal level, while each state—and often each local government—has its own set of tax rules. This decentralization means someone living in Texas (which has no state income tax) will have a different tax experience than someone in California or New York.

Types of Taxes

  • Federal Taxes: Individual and corporate income, payroll, estate, and gift taxes

  • State & Local Taxes: Sales, property, and sometimes income taxes

  • Excise Taxes: Levied on goods like alcohol, gasoline, and tobacco

Who Pays and How

U.S. citizens, residents, and some non-residents must file annual tax returns. While most employees have taxes withheld through their paycheck, others (especially freelancers and business owners) must file and pay taxes themselves, typically using Form 1040 and various schedules depending on their income type.

Demystifying Brackets, Deductions & Credits

  • Tax Brackets: The U.S. follows a progressive tax system—higher income means higher tax rates.

  • Deductions: These reduce taxable income. Most individuals opt for the standard deduction, while others itemize for additional savings.

  • Credits: These directly reduce your tax bill. For example, the Child Tax Credit or Education Credits can lower what you owe or even boost your refund.

> Think of deductions as discounts on the bill, and credits as coupons at the register.

Real-Life Scenarios

Let’s say Alex is a salaried software engineer earning $120,000 annually. He receives RSUs (taxed at vesting as income) and trades cryptocurrency (taxed as capital gains). He’ll file Form 1040, with W-2 for salary, and Forms 8949 & Schedule D for crypto and RSU sales.

Compare that to Raj, a self-employed retail shop owner in the U.S., who files Form 1040 with Schedule C and Schedule SE for self-employment tax.

Even a student like Lena, who works part-time and pays tuition, might file to claim education credits using Form 8863. The system adapts to each profile, but the paperwork does get real!

India vs. U.S.: Scale at a Glance

  • The IRS processed ~160 million income tax returns, while India’s Income Tax Department processed about 7 crore (70 million) 👉 The U.S. processed approximately 2.3 times more returns than India

  • The U.S. collected ~₹215.8 lakh crore in personal income tax, compared to India’s ₹12.9 lakh crore 👉 That’s nearly 17 times more revenue from individual income tax

> Disclaimer: These comparisons are intended solely to illustrate the scale and structure of each system. They are not a reflection of superiority or efficiency, as both systems are shaped by their own unique demographic, economic, and administrative contexts.

Final Thoughts

Understanding the U.S. taxation system is about more than just taxes—it’s about realizing how public policy, personal finance, and global economies are all interconnected. Whether you’re an auditor, a student, or just curious about economic frameworks, I hope this guide adds value to your learning journey.

Thanks for reading, more content coming soon:)...........

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