income tax in the us

Income taxes in the United States are imposed by the federal government, and most states. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable

deductions

. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed (with some exceptions in the case of Federal income taxation), but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.

In the

United States

, the term "payroll tax" usually refers to FICA taxes that are paid to fund Social Security and Medicare, while "income tax" refers to taxes that are paid into state and federal general funds.

Most business expenses are deductible. Individuals may also deduct a personal allowance (exemption) and certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits.

Capital gains are taxable, and capital losses reduce taxable income to the extent of gains (plus, in certain cases, $3,000 or $1,500 of ordinary income). Individuals currently pay a lower rate of tax on capital gains and certain corporate dividends.

Taxpayers generally must self assess income tax by filing tax returns. Advance payments of tax are required in the form of withholding tax or estimated tax payments. Taxes are determined separately by each jurisdiction imposing tax. Due dates and other administrative procedures vary by jurisdiction. April 15 following the tax year is the last day for individuals to file tax returns for federal and many state and local returns. Tax as determined by the taxpayer may be adjusted by the taxing jurisdiction.

Basics

Sources of U.S. income tax laws

United States income tax law comes from a number of sources. These sources have been divided by one author into three tiers as follows:
*''Tier 1''
**

United States Constitution

**

Internal Revenue Code

(IRC) (legislative authority, written by the

United States Congress

through legislation)
**Treasury regulations
**Federal court opinions (judicial authority, written by courts as interpretation of legislation)
**Treaties (executive authority, written in conjunction with other countries, subject to ratification in the United States by advice and consent of the U.S. Senate - other countries have their own ratification procedures)
*''Tier 2''
** Agency interpretative regulations (executive authority, written by the Internal Revenue Service (IRS) and Department of the Treasury), including:
*** Final, Temporary and Proposed Regulations promulgated under IRC § 7805 or other specific statutory authority;
*** Treasury Notices and Announcements;
*** Executive agreements with other countries;
** Public Administrative Rulings (IRS Revenue Rulings, which provide informal guidance on specific questions and are binding on all taxpayers)
*''Tier 3''
** Legislative History
** Private Administrative Rulings (private parties may approach the IRS directly and ask for a Private Letter Ruling on a specific issue – these rulings are binding only on the requesting taxpayer).

Where conflicts exist between various sources of tax authority, an authority in Tier 1 outweighs an authority in Tier 2 or 3. Similarly, an authority in Tier 2 outweighs an authority in Tier 3.''Id.'' Where conflicts exist between two authorities in the same tier, the "last-in-time rule" is applied. As the name implies, the "last-in-time rule" states that the authority that was issued later in time is controlling.

Regulations and case law serve to interpret the statutes. Additionally, various sources of law attempt to do the same thing. Revenue Rulings, for example, serves as an interpretation of how the statutes apply to a very specific set of facts. Treaties serve in an international realm.

Basic concepts

A tax is imposed on net taxable income in the United States by the federal, most state, and some local governments. Income tax is imposed on individuals, corporations, estates, and trusts. The definition of net taxable income for most sub-federal jurisdictions mostly follows the federal definition.

The rate of tax at the federal level is graduated; that is, the tax rates on higher amounts of income are higher than on lower amounts
Federal tax rates in 2018
varied from 10% to 37%. Some states and localities impose an income tax at a graduated rate, and some at a flat rate on all taxable income.

Individuals are eligible for a reduced rate of federal income tax on capital gains and qualifying dividends. The tax rate and some deductions are different for individuals depending o
filing status
Married individuals may compute tax as a couple or separately. Single individuals may be eligible for reduced tax rates if they are head of a household in which they live with a dependent.

Taxable income is defined in a comprehensive manner in the

Internal Revenue Code

and tax regulations issued by the Department of Treasury and the Internal Revenue Service. Taxable income is gross income as adjusted minus

deductions

. Most states and localities follow these definitions at least in part, though some make adjustments to determine income taxed in that jurisdiction. Taxable income for a company or business may not be the same as its book income.

Gross income include
all income earned or received from whatever source
This includes salaries and wages, tips, pensions, fees earned for services, price of goods sold, other business income, gains on sale of other property, rents received, interest and

dividend

s received, proceeds from selling crops, and many other types of income. Some income, such as municipal bond interest, is exempt from income tax.

Adjustments (usually reductions) to gross income
of individuals are made for contributions to many types of retirement or health savings plans, certain student loan interest, half of self-employment tax, and a few other items. The cost of goods sold in a business is a direct reduction of gross income.

Business deductions: Taxable income of all taxpayers is reduced by deductions for expenses related to their business. These include salaries, rent, and other business expenses paid or accrued, as well as allowances for depreciation. The deduction of expense
may result in a loss
Generally, such loss can reduce other taxable income, subject to some limits.

Personal deductions: The former deduction for personal exemptions wa
repealed for 2018 through 2025

Standard deduction: In addition, individuals get a deduction from taxable income for certain personal expenses. Alternatively, the individual may claim a standard deduction.
For 2018, the basic standard deduction
was $12,000 for single individuals or married persons filing separately, $24,000 for a joint return or surviving spouse, and $18,000 for a head of household. For tax year 2019, the basic standard deduction amounts are $12,200 for a single individual or married person filing separately, $24,400 for a joint return or surviving spouse return, and $18,350 for a head of household.

Itemized deductions: Those who choose to claim actua
itemized deductions
may deduct the following, subject to many conditions and limitations:
*Medical expenses in excess of 10% of adjusted gross income,
*Certain taxe
limited to $10,000 or $5,000 in 2018 through 2025

*Home mortgage interest,
*Contributions to charities,
*Losses on nonbusiness property due to casualty, and
*Deductions for expenses incurred in the production of income in excess of 2% of adjusted gross income.

Capital gains: and qualified dividends may be taxed as part of taxable income. However, the tax is limited to a lower tax rate. Capital gains include gains on selling stocks and bonds, real estate, and other capital assets. The gain is the excess of the proceeds over the adjusted tax basis (cost less depreciation deductions allowed) of the property. This lower rate of tax also applies to dividends from U.S. corporations and many foreign corporations. There are limits on how much net capital loss may reduce other taxable income.

Tax credits: All taxpayers are allowed a credit for foreign taxes and for a percentage o
certain types of business expenses
Individuals are also allowe
credits
related to education expenses, retirement savings, and child care expenses. Each of the credits is subject to specific rules and limitations. Some credits are treated as refundable payments.

Alternative minimum tax: All taxpayers are also subject to the Alternative Minimum Tax if their income exceeds certain exclusion amounts. This tax applies only if it exceeds regular income tax, and is reduced by some credits.

Additional Medicare tax: High-income earners may also have to pay an additional 0.9% tax on wages, compensation, and self-employment income.

Net investment income is subject to a
additional 3.8% tax
for individuals with income in excess of certain thresholds.

Tax returns: U.S. corporations and most resident individuals must file income tax returns to self assess income tax if any tax is due or to claim a tax refund. Some taxpayers must file an income tax return because they satisfy one of the several other conditions. Tax returns may b
filed electronically
Generally, an individual'
tax return covers the calendar year. Corporations may elect a different tax year
Most states and localities follow the federal tax year, and require separate returns.

Tax payment: Taxpayers mus
pay income tax
due without waiting for an assessment. Many taxpayers are subject to withholding taxes when they receive income. To the extent withholding taxes do not cover all taxes due, all taxpayers must mak
estimated tax payments
or face penalties.

Tax penalties: Failing to make payments on time, or failing to file returns, can result in substantial penalties. Certain intentional failures may result in jail time.

Tax returns may b
examined and adjusted
by tax authorities. Taxpayers hav
rights to appeal
any change to tax, and these rights vary by jurisdiction. Taxpayers may also go to court to contest tax changes. Tax authorities may not make changes after a certain period of time (generally three or four years from the tax return due date).

Federal income tax rates for individuals

Federal income brackets and tax rates for individuals are adjusted annually for inflation. The Internal Revenue Service (IRS) accounts for changes to the CPI and publishes the new rates as " Tax Rate Schedules".

Marginal tax rates

Marginal tax rates before 2018

Beginning in 2013, an additional tax of 3.8% applies to net investment income in excess of certain thresholds.

Marginal tax rates for 2018

Marginal tax rates for 2019

An individual pays tax at a given bracket only for each dollar within that tax bracket's range. The top marginal rate does not apply in certain years to certain types of income. Significantly lower rates apply after 2003 to capital gains and qualifying dividends (see below).

Example of a tax computation

Income tax for year 2017:

Single taxpayer making $40,000 gross income, no children, under 65 and not blind, taking standard deduction;
* $40,000 gross income – $6,350 standard deduction – $4,050 personal exemption = $29,600 taxable income
** amount in the first income bracket = $9,325; taxation of the amount in the first income bracket = $9,325 × 10% = $932.50
** amount in the second income bracket = $29,600 – $9,325 = $20,275.00; taxation of the amount in the second income bracket = $20,275.00 × 15% = $3,041.25
* Total income tax is $932.50 + $3,041.25 = $3,973.75 (~9.93%

effective tax

)

Note, however, that taxpayers with taxable income of less than $100,000 must use IRS provided tax tables. Under that table for 2016, the income tax in the above example would be $3,980.00.

In addition to income tax, a wage earner would also have to pay Federal Insurance Contributions Act tax (FICA) (and an equal amount of FICA tax must be paid by the employer):
* $40,000 (adjusted gross income)
** $40,000 × 6.2% = $2,480 (Social Security portion)
** $40,000 × 1.45% = $580 (Medicare portion)
* Total FICA tax paid by employee = $3,060 (7.65% of income)
* Total federal tax of individual = $3,973.75 + $3,060.00 = $7,033.75 (~17.58% of income)

Total federal tax including employer's contribution:
* Total FICA tax contributed by employer = $3,060 (7.65% of income)
* Total federal tax of individual including employer's contribution = $3,973.75 + $3,060.00 + $3,060.00 = $10,093.75 (~25.23% of income)

Effective income tax rates

Effective tax rates are typically lower than marginal rates due to various deductions, with some people actually having a negative liability. The individual income tax rates in the following chart include capital gains taxes, which have different marginal rates than regular income. Only the first $118,500 of someone's income is subject to social insurance (Social Security) taxes in 2016. The table below also does not reflect changes, effective with 2013 law, which increased the average tax paid by the top 1% to the highest levels since 1979, at an effective rate of 33%, while most other taxpayers have remained near the lowest levels since 1979.

Taxable income

Income tax is imposed as a tax rate times taxable income. Taxable income is defined as gross income less allowable deductions. Taxable income as determined for federal tax purposes may be modified for state tax purposes.

Gross income

The

Internal Revenue Code

states that "gross income means all income from whatever source derived," and gives specific examples.26 USC 61
Gross income is not limited to cash received, but "includes income realized in any form, whether money, property, or services." Gross income includes wages and tips, fees for performing services, gain from sale of inventory or other property, interest, dividends, rents, royalties, pensions, alimony, and many other types of income. Items must be included in income when received or accrued. The amount included is the amount the taxpayer is entitled to receive. Gains on property are the gross proceeds less amounts returned, cost of goods sold, or tax basis of property sold.

Certain types of income are exempt from income tax. Among the more common types of exempt income are interest on municipal bonds, a portion of Social Security benefits, life insurance proceeds, gifts or inheritances, and the value of many employee benefits.

Gross income is reduced by adjustments and deductions. Among the more common adjustments are reductions for alimony paid and IRA and certain other retirement plan contributions. Adjusted gross income is used in calculations relating to various deductions, credits, phase outs, and penalties.

Business deductions

Most business deductions are allowed regardless of the form in which the business is conducted. Therefore, an individual small business owner is allowed most of the same business deductions as a publicly traded corporation. A business is an activity conducted regularly to make a profit. Only a few business-related deductions are unique to a particular form of business-doing. The deduction of investment expenses by individuals, however, has several limitations, along with other itemized (personal) deductions.

The amount and timing of deductions for income tax purposes is determined under tax accounting rules, not financial accounting ones. Tax rules are based on principles similar in many ways to accounting rules, but there are significant differences. Federal deductions for most meals and entertainment costs are limited to 50% of the costs (with an exception for tax year 2021, allowing a 100% deduction for meals purchased in a restaurant). Costs of starting a business (sometimes called pre-operating costs) are deductible ratably over 60 months. Deductions for lobbying and political expenses are limited. Some other limitations apply.

Expenses likely to produce future benefits must be capitalized. The capitalized costs are then deductible as depreciation (see MACRS) or amortization over the period future benefits are expected. Examples include costs of machinery and equipment and costs of making or building property. IRS tables specify lives of assets by class of asset or industry in which used. When an asset the cost of which was capitalized is sold, exchanged, or abandoned, the proceeds (if any) are reduced by the remaining unrecovered cost to determine gain or loss. That gain or loss may be ordinary (as in the case of inventory) or capital (as in the case of stocks and bonds), or a combination (for some buildings and equipment).

Most personal, living, and family expenses are not deductible. Business deductions allowed for federal income tax are almost always allowed in determining state income tax. Only some states, however, allow itemized deductions for individuals. Some states also limit deductions by corporations for investment related expenses. Many states allow different amounts for depreciation deductions. State limitations on deductions may differ significantly from federal limitations.

Business deductions in excess of business income result in losses that may offset other income. However, deductions for losses from passive activities may be deferred to the extent they exceed income from other passive activities. Passive activities include most rental activities (except for real estate professionals) and business activities in which the taxpayer does not materially participate. In addition, losses may not, in most cases, be deducted in excess of the taxpayer's amount at risk (generally tax basis in the entity plus share of debt).

Personal deductions

Prior to 2018, individuals were allowed a special deduction called a personal exemption for dependents. This wa
not allowed after 2017
This was a fixed amount allowed each taxpayer, plus an additional fixed amount for each child or other dependents the taxpayer supports. The amount of this deduction was $4,000 for 2015. The amount is indexed annually for inflation. The amount of exemption was phased out at higher incomes through 2009 and after 2012 (no phase out in 2010–2012).

Citizens and individuals with U.S. tax residence may deduct a flat amount as a standard deduction. This was $12,000 for single individuals and $24,000 for married individuals filing a joint return for 2018. Alternatively, they may claim itemized deductions for actual amounts incurred for specific categories of nonbusiness expenses. Expenses incurred to produce tax exempt income and several other items are not deductible. Home owners may deduct the amount of interest and

property taxes

paid on their principal and second homes. Local and state income taxes are deductible through the SALT deduction, or the individual may elect to deduct state and local sales tax. Contributions to charitable organizations are deductible by individuals and corporations, but the deduction is limited to 50% and 10% of gross income, respectively. Medical expenses in excess of 10% of adjusted gross income are deductible, as are uninsured casualty losses. Other income producing expenses in excess of 2% of adjusted gross income are also deductible. Before 2010, the allowance of itemized deductions was phased out at higher incomes. The phase out expired for 2010.

Retirement savings and fringe benefit plans

Employers get a deduction for amounts contributed to a qualified employee retirement plan or benefit plan. The employee does not recognize income with respect to the plan until he or she receives a distribution from the plan. The plan itself is organized as a trust and is considered a separate entity. For the plan to qualify for tax exemption, and for the employer to get a deduction, the plan must meet minimum participation, vesting, funding, and operational standards.

Examples of qualified plans include:
*Pension plans (defined benefit pension plan),
*Profit sharing plans (defined contribution plan),
*Employee Stock Ownership Plan (ESOPs),
*Stock purchase plans,
*Health insurance plans,
*Employee benefit plans,
*Cafeteria plans.

Employees or former employees are generally taxed on distributions from retirement or stock plans. Employees are not taxed on distributions from health insurance plans to pay for medical expenses. Cafeteria plans allow employees to choose among benefits (like choosing food in a cafeteria), and distributions to pay those expenses are not taxable.

In addition, individuals may make contributions to Individual Retirement Accounts (IRAs). Those not currently covered by other retirement plans may claim a deduction for contributions to certain types of IRAs. Income earned within an IRA is not taxed until the individual withdraws it

Capital gains

Taxable income includes capital gains. However, individuals are taxed at a lower rate on long term capital gains and qualifying dividends (see below). A capital gain is the excess of the sales price over the tax basis (usually, the cost) of capital assets, generally those assets not held for sale to customers in the ordinary course of business. Capital losses (where basis is more than sales price) are deductible, but deduction for long term capital losses is limited to the total capital gains for the year, plus for individuals up to $3,000 of ordinary income ($1,500 if married filing separately). An individual may exclude $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of the individual's primary residence, subject to certain conditions and limitations. Gains on depreciable property used in a business are treated as ordinary income to the extent of depreciation previously claimed.

In determining gain, it is necessary to determine which property is sold and the amount of basis of that property. This may require identification conventions, such as first-in-first-out, for identical properties like shares of stock. Further, tax basis must be allocated among properties purchased together unless they are sold together. Original basis, usually cost paid for the asset, is reduced by deductions for

depreciation

or loss.

Certain capital gains are deferred; that is, they are taxed at a time later than the year of disposition. Gains on property sold for installment payments may be recognized as those payments are received. Gains on property exchanged fo
like kind
property are not recognized, and the tax basis of the new property is based on the tax basis of the old property.

Before 1986 and from 2004 onward, individuals were subject to a reduced rate of federal tax on capital gains (called long-term capital gains) on certain property held more than 12 months. The reduced rate of 15% applied for regular tax and the Alternative Minimum Tax through 2011. The reduced rate also applies to dividends from corporations organized in the United States or a country with which the United States has an income tax treaty. This 15% rate was increased to 20% in 2012. Beginning in 2013, capital gains above certain thresholds is included in net investment income subject to an additional 3.8% tax.

:*Capital gains up to $250,000 ($500,000 if filed jointly)
on real estate used as primary residence are exempt

Accounting periods and methods

The US tax system allows individuals and entities to choose their tax year. Most individuals choose the calendar year. There are restrictions on choice of tax year for some closely held entities. Taxpayers may change their tax year in certain circumstances, and such change may require IRS approval.

Taxpayers must determine their taxable income based on their method of accounting for the particular activity. Most individuals use the cash method for all activities. Under this method, income is recognized when received and deductions taken when paid. Taxpayers may choose or be required to use the accrual method for some activities. Under this method, income is recognized when the right to receive it arises, and deductions are taken when the liability to pay arises and the amount can be reasonably determined. Taxpayers recognizing cost of goods sold on inventory must use the accrual method with respect to sales and costs of the inventory.

Methods of accounting may differ for financial reporting and tax purposes. Specific methods are specified for certain types of income or expenses. Gain on sale of property other than inventory may be recognized at the time of sale or over the period in which installment sale payments are received. Income from long-term contracts must be recognized ratably over the term of the contract, not just at completion. Other special rules also apply.

Other taxable and tax exempt entities

Partnerships and LLCs

Business entities treated as partnerships ar
not subject to income tax
at the entity level. Instead, their member
include their shares
of income, deductions, and credits in computing their own tax. The character of the partner's share of income (such as capital gains) is determined at the partnership level. Many types of business entities, including limited liability companies (LLCs), may elect to be treated as a corporation or as a partnership. Distributions from partnerships are not taxed as dividends.

Corporations

Corporate tax is imposed in the U.S. at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Shareholders of a corporation wholly owned by U.S. citizens and resident individuals may elect for the corporation to be taxed similarly to partnerships, as an S Corporation. Corporate income tax is based on taxable income, which is defined similarly to individual taxable income.

Shareholders (including other corporations) of corporations (other than S Corporations) are taxed on

dividend

distributions from the corporation. They are also subject to tax on capital gains upon sale or exchange of their shares for money or property. However, certain exchanges, such as in reorganizations, are not taxable.

Multiple corporations may file a consolidated return at the federal and some state levels with their common parent.

Corporate tax rates

Federal corporate income tax is imposed a
21%
from 2018. Dividend exclusions and certain corporation-only deductions may significantly lower the effective rate.

Deductions for corporations

Most expenses of corporations are deductible, subject to limitations also applicable to other taxpayers. See relevant deductions for details. In addition, regular U.S. corporations are allowed a deduction o
100% of dividends received
from 10% or more foreign subsidiaries
50% of amounts included in income
unde
section 951A
an
37.5% of foreign branch income

Some deductions of corporations are limited at federal or state levels. Limitations apply to items due t
related parties
including interest and royalty expenses.

Estates and trusts

Estates and trusts may b
subject to income tax
at the estate or trust level, or th
beneficiaries may be subject to income tax
on their share of income. Where income must be distributed, the beneficiaries are taxed similarly to partners in a partnership. Where income may be retained, the estate or trust is taxed. It may get a deduction for later distributions of income. Estates and trusts are allowed only those deductions related to producing income, plus $1,000. They are taxed at graduated rates that increase rapidly to the maximum rate for individuals. The tax rate for trust and estate income in excess of $11,500 was 35% for 2009. Estates and trusts are eligible for the reduced rate of tax on dividends and capital gains through 2011.

Tax-exempt entities

U.S. tax law exempts certain types of entities from income and some other taxes. These provisions arose during the late 19th century. Charitable organizations and cooperatives may apply to the IRS for tax exemption. Exempt organizations are still taxed on any business income. An organization which participates in

lobbying

,

political campaign

ing, or certain other activities may lose its exempt status. Special taxes apply to prohibited transactions and activities of tax-exempt entities.

Other tax items

Credits

The federal and state systems offer numerous tax credits for individuals and businesses. Among the key federal credits for individuals are:
* Child credit: For 2017, a credit up to $1,000 per qualifying child. For 2018–2025, the credit rose to $2,000 per qualifying child but made having a Social Security Number (SSN) a condition of eligibility for each child. For 2021, the credit was temporarily raised to $3,000 per child aged 6–17 and $3,600 per qualifying child aged 0–5 and was made fully refundable.
* Child and dependent care credit: a credit up to $2,100, phased out at incomes above $15,000.
* Earned Income Tax Credit: this refundable credit is granted for a percentage of income earned by a low income individual. The credit is calculated and capped based on the number of qualifying children, if any. This credit is indexed for inflation and phased out for incomes above a certain amount. For 2015, the maximum credit was $6,422.
*Credit for the elderly and disabled: A nonrefundable credit up to $1,125
*Two mutually exclusive credits for college expenses.

Businesses are also eligible for several credits. These credits are available to individuals and corporations, and can be taken by partners in business partnerships. Among the federal credits included in a "general business credit" are:
* Credit for increasing research expenses.
*Work Incentive Credit or credit for hiring people in certain enterprise zones or on welfare.
*A variety of industry specific credits.

In addition, a federal foreign tax credit is allowed for foreign income taxes paid. This credit is limited to the portion of federal income tax arising due to foreign source income. The credit is available to all taxpayers.

Business credits and the foreign tax credit may be offset taxes in other years.

States and some localities offer a variety of credits that vary by jurisdiction. States typically grant a credit to resident individuals for income taxes paid to other states, generally limited in proportion to income taxed in the other state(s).

Alternative minimum tax

Taxpayers must pay the higher of the regular income tax or the alternative minimum tax (AMT). Taxpayers who have paid AMT in prior years may claim a credit against regular tax for the prior AMT. The credit is limited so that regular tax is not reduced below current year AMT.

AMT is imposed at a nearly flat rate (20% for corporations, 26% or 28% for individuals, estates, and trusts) on taxable income as modified for AMT. Key differences between regular taxable income and AMT taxable income include:
*The standard deduction and personal exemptions are replaced by a single deduction, which is phased out at higher income levels,
*No deduction is allowed for individuals for state taxes,
*Most miscellaneous itemized deductions are not allowed for individuals,
*Depreciation deductions are computed differently, and
*Corporations must make a complex adjustment to more closely reflect economic income.

Special taxes

There are many federal tax rules designed to prevent people from abusing the tax system. Provisions related to these taxes are often complex. Such rules include:
*Accumulated earnings tax on corporation accumulations in excess of business needs,
* Personal holding company taxes,
* Passive foreign investment company rules, and
*Controlled foreign corporation provisions.

Special industries

Tax rules recognize that some types of businesses do not earn income in the traditional manner and thus require special provisions. For example, insurance companies must ultimately pay claims to some policy holders from the amounts received as premiums. These claims may happen years after the premium payment. Computing the future amount of claims requires actuarial estimates until claims are actually paid. Thus, recognizing premium income as received and claims expenses as paid would seriously distort an insurance company's income.

Special rules apply to some or all items in the following industries:
Insurance companies
(rules related to recognition of income and expense; different rules apply to life insurance and to property and casualty insurance)
*Shipping (rules related to the revenue recognition cycle)

(rules related to expenses for exploration and development and for recovery of capitalized costs)

In addition, mutual funds

are subject to special rules allowing them to be taxed only at the owner level. The company must report to each owner his/her share of ordinary income, capital gains, and creditable foreign taxes. The owners then include these items in their own tax calculation. The fund itself is not taxed, and distributions are treated as a return of capital to the owners. Similar rules apply t
real estate investment trusts
an

State, local and territorial income taxes

Income tax is also levied by most U.S. states and many localities on individuals, corporations, estates, and trusts. These taxes are in addition to federal income tax and are deductible for federal tax purposes. State and local income tax rates vary from 1% to 16% of taxable income. Some state and local income tax rates are flat (single rate) and some are graduated. State and local definitions of what income is taxable vary highly. Some states incorporate the federal definitions by reference. Taxable income is defined separately and differently for individuals and corporations in some jurisdictions. Some states impose alternative or additional taxes based on a second measure of income or capital.

States and localities tend to tax all income of residents. States and localities only tax nonresidents on income allocated or apportioned to the jurisdiction. Generally, nonresident individuals are taxed on wages earned in the state based on the portion of days worked in the state. Many states require partnerships to pay tax for nonresident partners.

Tax returns are filed separately for states and localities imposing income tax, and may be due on dates that differ from federal due dates. Some states permit related corporations to file combined or consolidated returns. Most states and localities imposing income tax require estimated payments where tax exceeds certain thresholds, and require withholding tax on payment of wages.

Puerto Rico

also imposes its own taxation laws; however, unlike in the states, only some residents there pay federal income taxes (though everyone must pay all other federal taxes).Contrary to common misconception, residents of Puerto Rico do pay U.S. federal taxes: customs taxes (which are subsequently returned to the Puerto Rico Treasury) (Se
Dept of the Interior, Office of Insular Affairs. DOI.gov)
, import/export taxes (Se
Stanford.wellsphere.com)
, federal commodity taxes (Se
Stanford.wellsphere.com)
, social security taxes (Se

etc. Residents pay federal payroll taxes, such as Social Security (Se
IRS.gov
and Medicare (Se
Reuters.com)
as well as Commonwealth of Puerto Rico income taxes (Se

an

). All federal employees (Se
Heritage.org)
, those who do business with the federal government (Se
MCVPR.com)
, Puerto Rico-based corporations that intend to send funds to the U.S. (Se
p. 9, line 1.)
and some others (For example, Puerto Rican residents that are members of the U.S. military, Se
Heritage.org
; and Puerto Rico residents who earned income from sources outside Puerto Rico, Se
pp 14–15.)
also pay federal income taxes. In addition, because the cutoff point for income taxation is lower than that of the U.S. IRS code, and because the per-capita income in Puerto Rico is much lower than the average per-capita income on the mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. This occurs because "the Commonwealth of Puerto Rico government has a wider set of responsibilities than do U.S. State and local governments" (Se
GAO.gov
. As residents of Puerto Rico pay into Social Security, Puerto Ricans are eligible for Social Security benefits upon retirement, but are excluded from the Supplemental Security Income (SSI) (Commonwealth of Puerto Rico residents, unlike residents of the Commonwealth of the Northern Mariana Islands and residents of the 50 States, do not receive the SSI. Se
Socialsecurity.gov)
and the island actually receives less than 15% of the Medicaid funding it would normally receive if it were a U.S. state. However, Medicare providers receive less-than-full state-like reimbursements for services rendered to beneficiaries in Puerto Rico, even though the latter paid fully into the system (Se
p 252).
In general, "many federal social welfare programs have been extended to Puerto Rican (''sic'') residents, although usually with caps inferior to those allocated to the states." (The Louisiana Purchase and American Expansion: 1803–1898. By Sanford Levinson and Bartholomew H. Sparrow. New York: Rowman and Littlefield Publishers. 2005. Page 167. For a comprehensive coverage of federal programs made extensive to Puerto Rico see Richard Cappalli's Federal Aid to Puerto Rico (1970)). It has also been estimated (Se

that, because the population of the Island is greater than that of 50% of the States, if it were a state, Puerto Rico would have six to eight seats in the House, in addition to the two seats in the Senate.(Se

an
Thomas.gov
Puerto_Rico_Democracy_Act_of_2007

The_Puerto_Rico_Democracy_Act_is_a_bill_(proposed_law),_bill_to_provide_for_a_federally_sanctioned_self-determination_process_for_the_people_of_Puerto_Rico.

This_act_would_provide_for_plebiscites_to_be_held_in_Puerto_Rico_to_determine_Politic_...
."_These_are_the_steps_to_follow
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>_Committee_Reports_>_110_>_drop_down_"Word/Phrase"_and_pick_"Report_Number"_>_type_"597"_next_to_Report_Number._This_will_provide_the_document_"House_Report_110-597_-__2007",_then_from_the_Table_of_Contents_choose_"Background_and_need_for_legislation".)._Another_misconception_is_that_the_import/export_taxes_collected_by_the_U.S._on_products_manufactured_in_Puerto_Rico_are_all_returned_to_the_Puerto_Rico_Treasury._This_is_not_the_case._Such_import/export_taxes_are_returned_''only''_for_rum_products,_and_even_then_the_US_Treasury_keeps_a_portion_of_those_taxes_(See_the_"House_Report_110-597_-_Puerto_Rico_Democracy_Act#Puerto_Rico_Democracy_Act_of_2007.html" "title="Puerto Rico Democracy Act#Puerto Rico Democracy Act of 2007">Puerto Rico Democracy Act of 2007