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What Is a Tax System?

A tax system is a legal method of assessing and collecting taxes.

Levying systems include:

Types of Tax Systems

Tax systems are divided into three categories: regressive, proportional, and progressive. Each has merits and flaws.

Regressive Taxes

The government bases regressive taxes on a percentage of what an individual owns or buys, rather than their income level. Because this type of tax isn’t income based, it has a higher impact on low-income families and individuals. Real estate taxes, sales taxes, and excise taxes on items like gas, alcohol, and cigarettes are all examples of a regressive tax.

Proportional Taxes

Also known as a flat tax system, proportional taxes assess the same percentage to everyone, regardless of income level. For example, at an income tax rate of 10 percent, a family making $20,000 per year would pay $2,000, while a family making $200,000 would pay $20,0000.

Proponents of this tax assert that it is fairer than either regressive or progressive tax systems. However, others note that it still has a disproportionate effect on people who earn less. In the example above, the higher earning family has $180,000 left to live on, while the low-income family has only $18,000.

Progressive Taxes

Progressive tax systems are designed to increase tax percentages as income increases. The wealthiest individuals in the United States may pay nearly 40 percent in income tax. Trickle-down economic theories indicate that progressive taxes may negatively affect the economy by taxing money that could be used to create new jobs.

Income Tax System

The American income tax system is divided into seven brackets. Since the US tax system is progressive, individuals who earn less are taxed less, and those who earn more are taxed more. Tax percentages range from 10 percent for single filers who make under $9,275 per year to 39.6 percent for individuals who make over $415,050 annually.

Alternative Minimum Tax System

Congress created the Alternative Minimum Tax (AMT) as a way to make sure the wealthy paid at least some income tax. Enough loopholes existed that a small minority of wealthy individuals had zero tax liability.

Because the AMT wasn’t originally adjusted for inflation, it now affects middle-class taxpayers. However, in January 2015, Congress passed inflation adjustments that go up every year.

To determine whether you owe Alternative Minimum Tax, fill out IRS form 6251, then compare it to your regular tax return. If form 6251 shows you owe more tax, you must pay the difference as an AMT. The exact amount can range from hundreds to thousands of dollars in tax liability.

Tax Relief Systems

Income tax credits and deductions provide tax relief, provided the taxpayer meets specific conditions. Many provide tax breaks for low-income families. Others target small businesses or corporations.

Tax credits are counted as money already paid to the government, and can result in a refund. The most frequently used tax credits are the Earned Income Credit (EIC), child tax credit, education credit, foreign tax credit, and child care credit.

Tax deductions reduce tax liability. Common deductions include business expenses, health insurance premiums, retirement savings, and charitable gifts.

Tax systems are legal systems for assessing and collecting taxes. Tax systems may be recessive, proportional, or progressive. Ask an Expert to learn which tax systems affect you. Tax Accountants provide affordable answers any time of the day or night.

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