Personal Income Tax in the US

Full Disclaimer: you know by now that I am not a tax expert. Please talk to the accountant in case you need professional advice, the examples below are for illustrative purposes. We will assume that you are working and make a salary, that’s your only income, no interest, dividend etc. 

Taxes are complex in the US. The whole approach to taxation is different from the countries we come from. In my country for example, the employer would deduct certain percentage of your salary and then you forget about your taxes. 

Well, it’s not quite like that in the US. Yes, your employer will be deducting some taxes. But you will also need to file your taxes every year by April 15th. After you file the taxes you will know whether the government owes you taxes or you owe the government. 

So what are the taxes you will pay from your salary? See below few: 

Federal Tax – that’s the tax you pay to the federal government. Its based on the income you are making and is calculated in ranges below. 

Below is a federal tax ranges for 2020 (source: HR block https://www.hrblock.com/tax-center/irs/tax-brackets-and-rates/what-are-the-tax-brackets/)

2020 Tax Brackets
RateSingleMarried Filing SeparatelyMarried Filing JointlyHead of Household
12%   $9,875    $9,875  $19,750  $14,100
22%  $40,125  $40,125  $80,250  $53,700
24%  $85,525  $85,525$171,050  $85,500
32%$163,300$163,300$326,600$163,300
35%$207,350$207,350$414,700$207,350
37%$518,400$518,400$622,050$518,400

So if you are single and made lets say made $20,000 in 2020, so you will pay 12% on your first $9,875 and 22% on your remainder $10,125. So the total federal taxes you will pay on your income is: $1,185 (first $9,875) + $2,227 ($10,125) = $3,412. Your effective federal tax rate is $3,412/$20,000 = 17%

State Income Tax – these are the taxes you pay to you State. Good news! There are states where you don’t pay State Income Tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. 

So, living in these States could save on your taxes. Now for our illustrative purposes let’s assume that you live in New York. States just like Federal Government have tax brackets: 

Tax rateSingle or married filing separatelyHead of householdMarried filing jointly or qualified widow(er)
4%$0–$8,500$0–$12,800$0–$17,150
4.5%$8,501–$11,700$12,801–$17,650$17,151–$23,600
5.25%$11,701–$13,900$17,651–$20,900$23,601–$27,900
5.9%$13,901–$21,400$20,901–$32,200$27,901–$43,000
6.33%$21,401–$80,650$32,201–$107,650$43,001–$161,550
6.57%$80,651–215,400$107,651–$269,300$161,551–$323,200
6.85%$215,401–$1,077,550$269,301–$1,606,450$323,201–$2,155,350
8.82%$1,077,551 and more$1,616,451 and more$2,155,351 and more

Source: Credit Karma: https://www.creditkarma.com/tax/i/new-york-state-income-tax-rate/

Let’s calculate your taxes for the State, remember you are single and made $20,000. You will pay 4% on the first $8,500 ($340) + $143 (income from $8,501-$11,700) + $115 (income from $11,701 – $13,900) + $359 (income from $13,901 to $20,000). A total of $957. Your effective State Tax rate is $957/$20,000 = 4.785%

It’s not all. Some cities charge City Tax. In New York City for example you will need to pay City Tax, its also in ranges: 

New York City income tax rates
Tax rateSingle or married filing separatelyHead of householdMarried filing jointly or qualified widow(er)
3.078%$0–$12,000$0–$14,400$0–$21,600
3.762%$12,001–$25,000$14,401–$30,000$21,601–$45,000
3.819%$25,001–$50,000$30,001–$60,000$45,001–$90,000
3.876%$50,001 and more$60,001 and more$90,001 and more

Source: Credit Karma: https://www.creditkarma.com/tax/i/new-york-state-income-tax-rate/

So your City Income Tax is: 3.078% on your first $12,000 ($369) and 3.762% on the next $8,000 ($301) = $670. 

Hence so far being single sucks tax wise. You have paid on your $20,000 Federal Tax: $3,412 plus State Tax: $957 plus NYC Tax: $670. Thus, a total of $5,039. 

You also need to pay Social Security Tax: this is a tax you and your employer pay to Social Security to fund the program. Social Security Administration defines the Social Security program as: “The Social Security program in the United States provides protection against the loss of earnings due to retirement, death, or disability.” You and your employer pay 6.2% each. So, your Social Security tax is: $1,240. 

Medicare tax is 1.42% and both you and employer pay this. This tax funds Medicare program. So, your share is: $284. 

So, lets sum it all up again, the taxes you paid on your $20,000: 

Federal Income Tax: $3,412

State Income Tax: $957

NYC Income Tax: $670

Social Security Tax: $1,240

Medicare Tax: $284

Total: $6,563

If you sum up you paid 32.815% on your $20,000 income. Now you might think it’s a lot, and its true. But every year you file taxes and depending on your individual situation you can reduce your tax burden, by reducing your taxable income. You can do itemized deductions or standard deduction and the taxes paid will be calculated on reduced taxable income and will be returned to you. 

I mentioned it in the beginning of the post, I will mention it once again. I am not an accountant, I just provided this as an example of what to expect and what kind of taxes you might pay on your paycheck. 

Leave a Reply

Your email address will not be published. Required fields are marked *