A Beginner’s Guide to USA Tax System
To begin with, the Internal Revenue Service, IRS, is the agency responsible for all tax collection for the USA federal government.
Also, the USA has a multi-layered tax system in which taxes are imposed by the federal, state, and sometimes even local governments. So apart from filing federal tax forms, a person may also be liable to file state tax returns. And a failure to do that may result in heavy penal charges.
That said, there are some specific states in the USA that do not charge any taxes. These include Florida, Alaska, New Hampshire, Texas, Nevada, South Dakota, Washington, Wyoming, and Tennessee. So apart from these states, individuals living in any other state are required to file two separate tax returns, one for the federal government and another for the state. In some cases, the villages or counties may have their separate tax in addition to the state taxes.
Understanding ITIN and SSN in the USA Tax System
When it comes to the taxation system in the USA, two fundamental forms of national IDs are issued to the people: ITIN, i.e. Individual Taxpayer ID Number, and SSN, i.e. Social Security Number. All USA citizens are issued an SSN for filing their taxes. And for non-US residents, there is ITIN.
The ITIN is a nine-digit individual tax id number that was first created by the IRS in 1996. It allows non-citizens of the USA, who are not eligible for a social security number card, to pay taxes without any issue. It is crucial to understand that ITIN is typically associated with partnerships, corporations, etc. In no way does it offer a legal immigration or work status to the holders.
An SSN, on the other hand, is only given to the citizens of the country. It is also a nine-digit number that provides legal work and immigration status to the holders. For every resident taxpayer having an SSN is mandatory by law. The number helps the government keep a track of all the records of a person’s income and the number of years worked. Using this number, one can claim various benefits.
A non-US citizen can apply for an SSN by filling out the “Form SS-5”. In the process, they need to provide all information about their identity, work eligibility, and immigration status.
Note: No person should under any circumstance possess both SSN and ITIN at the same time.
Income Taxation in the United States
Now let’s talk about the most important aspect of the USA tax system, income taxation. Once the individuals have received their income, they are mandated to pay taxes to the state and federal governments.
Every individual needs to fill out an ITR (income tax return) form, providing their details such as total income earned and the amount of tax applicable. All the ITRs are submitted to the IRS, which is the federal tax authority.
Moving on, let us look at the different types of ITR forms offered under the USA taxation system.
Form 1040 – Individual Tax Returns
This form has to be filled out by the individuals who are considered to be a citizen of the USA. It is one of the most common forms used to report taxable income.
Form 1041 – Estate and Trust
This type of form is filed by the trustee of an estate or trust.
Form 1065 – Partnerships
A partnership defines a relationship between two or more people who carry on a business together. This form is filed by all foreign and domestic partnerships.
Form 1120 – Corporations
This form has to be filed by all corporations, including those in bankruptcy. And if a corporation is elected as an S Corporation, it has to file Form 1120-S.
The USA tax system is slightly complex as it requires filing a lot of forms along with additional attachments. Additionally, the separate tax mechanism for state and federal laws makes it difficult for people to understand things. In most cases, hiring a professional attorney for filing taxes in the proper format proves to be beneficial.
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