Understanding individual income tax in the United States

The Internal revenue service or IRS collects the federal individual income tax in the US. The IRS is a branch of the US treasury and this tax has to be paid if you live in US. At the same time, most of the states also levy taxes on individuals. However, the states of Alaska, Wyoming, Washington, South Dakota, Florida, Texas and Nevada don’t have any state income tax. Tennessee and New Hampshire only impose tax on interest earned and dividend income. Usually states that don’t charge income tax, make up for it by levying other types of taxes like property tax or sales tax. Some places may also have city income tax or municipality income tax.

Individual Income Tax

A tax year is started from 1st January to 31st December and the federal income tax returns have to be filed by individuals by 15th April. States may have dissimilar timelines for filing income tax; however, the federal income tax deadline is as mentioned above. In case you are unable to file the return on time due to a legitimate reason you can apply for an expansion by filing Form 4868 to the IRS. An extension is generally allowed till 15th August to file your federal income tax returns. An annex to pay the Individual Income Tax return does not provide you with an expansion for giving your tax. Interest is also charged on any taxes that were unpaid; hence you should not apply for an extension if you don’t in fact need it.

Filing tax

Basic tax forms are available free of cost at post offices, libraries, banks, etc. They can also be downloaded from the IRS website. These forms carry detailed instructions and worksheets with them which makes it possible to file the return yourself. You can also get professional help to file taxes or use some easily available software. As an alternative you can efile the taxes on the IRS website. Before filing the tax on the website, however, you need to obtain a PIN number from the website by providing your date of birth, social security number and information from the previous year’s tax return. If you are filing your return online, then make sure to print a hard copy for your records and preserve it for at least 7 years.

Tax withholding

When you are doing a job, your company is supposed to subtract federal individual income tax along with state income tax (if applicable) from your salary amount. The company is also required to subtract the amounts for social security and Medical reasons. These are jointly known as F.I.C.A and usually amount to 7.6% of an individual’s gross earnings. The owner is also supposed to give the similar amount of this deduction. All these tax deductions have to be deposited on the basis of a particular period to the suitable government establishment. The employer has to send all employees Form W-2 by 31st January for all salaries paid in the preceding year. This form is for the employee’s wages and tax deductions.

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Living in No Income Tax States

There are a total of seven states in the US that do not levy income taxes and there are the other two states that do not levy taxes on wage income. There are a lot of people who are of the view that living in these states in the US might be quite appealing. This is because they expect their paychecks to be higher if they choose to live in any one of these states. However, there are a number of factors that need to be considered before jumping for a move to these states. The non income tax states in the US include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Apart from this, Tennessee and New Hampshire are the states that do not levy taxes on wage income.

No Income Tax StatesIs it a Good Thing that these States do not Levy Income Tax?

People who do not have to pay income taxes or the ones living in these states often put forward the claim that there are better job opportunities created in their states. They are also of the view that their states can retain educated professionals and workers more effectively. However, evidence available does not favor these arguments. According to a report presented by the Institute on Taxation and Economic Policy in the year 2013, job growth lagged behind the growth of population in eight out of the nine states in the US that do not tax wages. Another report presented by the center on Budget and Policy Priorities claims that people generally decide the state that they need to live in depending on whether the state has income tax or not. In addition to this, it is important to note that absence of income tax is generally a disadvantage. This is because of the higher rates of property and sales taxes and various other sources of state revenue. For example, Washington State possesses the highest gasoline and sales taxes throughout America; New Hampshire possesses the highest rates on property taxes while Tennessee possesses the highest sales tax rate in the United States.

The Takeaway

Finally, there can be a solid argument made in support of the fact that income tax absence in the states of US is quite unfair for the poor. The taxes levied on the income of an individual tend to be higher for the individuals with high income. On the other hand, property and sales taxes cost low-income individuals more in comparison to their paychecks. This is absolutely unequal for the people who do not have huge earnings.


Just because a state does not have income tax does not mean that an individual in that state will be successful in saving a huge amount of money. It is to be noted that income tax tends to be one of those important financial factors that need to be evaluated prior to deciding the state where an individual wants to live.

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