Taxable Income

In the U.S., taxable income is subject to multiple layers of taxation, depending on your residency status, income level, and location. Here’s a breakdown of the key taxes that may apply:

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1. Federal Income Tax

• What it is: A progressive tax on your worldwide income (if a resident alien) or U.S.-sourced income (if a nonresident alien).
• Tax Rates (2024):
  • 10%–37% (for individuals, based on income brackets).
  • Capital gains tax (0%, 15%, or 20% for long-term investments).
• Forms:
  • Residents: Form 1040
  • Nonresidents: Form 1040-NR

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2. State Income Tax

• What it is: Tax imposed by your state of residence (or work, for nonresidents).
• Rates: Vary by state (e.g., 0% in Texas/Florida, up to 13.3% in California).
• Who pays:
  • Residents: Taxed on all income (even from other states).
  • Nonresidents: Taxed only on income earned in that state.

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3. Local Income Tax

• What it is: Additional tax levied by some cities/counties (e.g., NYC, Philadelphia).
• Rates: Typically 1%–4% (e.g., 3.876% in NYC for residents).

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4. FICA Taxes (Social Security & Medicare)

• What it is: Payroll taxes funding federal benefits (see previous answer).
• Who pays:
  • Employees: 7.65% (6.2% Social Security + 1.45% Medicare).
  • Self-employed: 15.3% (both halves).
  • Exemptions: F-1/J-1 students (first 5 years).

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5. Additional Taxes (For High Earners or Special Cases)

• Net Investment Income Tax (NIIT):
  • 3.8% on investment income (e.g., dividends, rental income) if AGI > $200K (Single)/$250K (Married).
• Alternative Minimum Tax (AMT):
  • Ensures high-income taxpayers pay a minimum tax (26%–28% rates).
• Self-Employment Tax:
  • 15.3% for freelancers (covers Social Security + Medicare).

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How It Works Together

Example (Single Filer in California, $100K Salary)

1. Federal Income Tax: ~$18,000 (varies with deductions).
2. State Tax (CA): ~$6,500 (6% avg).
3. FICA Taxes: $7,650 (7.65% of $100K).
4. Local Tax (if any): e.g., $0 (no local tax in most CA cities).
   Total Estimated Tax: ~$32,150 (before deductions/credits).

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Key Differences: Resident vs. Nonresident

| Tax Type | Resident Alien | Nonresident Alien (e.g., F-1 OPT) |
|——————|——————————–|———————————–|
| Federal Tax | Worldwide income (Form 1040) | Only U.S. income (Form 1040-NR) |
| State Tax | All income (if state resident) | Only income earned in that state |
| FICA Taxes | Yes (unless exempt) | Exempt (F-1/J-1 first 5 years) |

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What You Can Do to Reduce Taxes

• Deductions: Standard/itemized deductions (e.g., student loan interest).
• Credits: Child Tax Credit, Foreign Tax Credit (if paying taxes abroad).
• Tax Treaties: Some countries (e.g., India, China) offer reduced rates.