Tax Law Outline

The US federal government imposes a progressive tax on the taxable income of individuals, corporations and partnerships. There are a few state governments that also impose income taxes. Since US tax law is not that easy to understand, you will likely need to take the services of a tax specialist.

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AGI, Credits and Deductions

Adjusted Gross Income for US citizens is gross income less any above-the-line deductions. Above-the-line deductions consist of moving expenses, alimony and business deductions. Personal exemptions can be eliminated for higher income taxpayers. You will get standard deduction if you are a non-itemizer. Itemized deductions contain a few medical expenses and charitable contributions.

Tax credits are more useful than deductions. This is because tax credits are applied after the tax rate, which is not the case with deductions. For example, with a 25% tax rate, a deduction of $200 will save only $50 of taxes. On the other hand, a $200 credit will save you $200 worth of taxes.

Tax Divisions

Income can be divided in many ways for tax routines. To start with, there is a division between capital gains and ordinary income. Ordinary income contains interest income from invested funds, business profit and salaries. Capital gain is all about investment property sale. Capital gains tax rate are comparatively lower than ordinary income rate.

The marginal income tax bracket in the US is decided on the basis of tax filing classification and income. Statistics-wise, there are six tax brackets for ordinary income. The four classifications are single, married filing jointly, married filing separately, and household head.

Tiers

There is a wide array of sources for US income tax law. All these sources have been divided into three tiers. In the first tier there is the US constitution, treasury regulations, federal court opinions, treaties and Internal Revenue Code. Tier two consists of Department of treasury and public administrative rulings. In tier three, there are private administrative rulings and legislative history. Income tax codes are often legislature favored policy in the US. The purchase of life insurance, home ownership and the funding of employee health care come under income tax codes.