US Income Tax/Tax Liability

US Income Tax Introduction Income Gains and Losses Capital Gains Business Deductions Personal Deductions Tax Liability Tax Credits

Who pays tax, and how much they pay, is dependent on the type of entity paying the tax.

Families

Married taxpayers

If a taxpayer is married, they can either file a joint return with their spouse, or file separately.

One commonly-debated point of income tax law is the marriage penalty. Married taxpayers are taxed at different rates than single taxpayers whether they file jointly or separately. The "marriage penalty" is most pronounced when spouses have equal incomes, and becomes less detrimental as the spouses' incomes diverge. When one spouse has much more income than the other, the couple's tax liability is actually lower than it would be if they were both single. For instance, under the Code's rates unadjusted for inflation, a married couple with taxable income of $100,000 would pay $23,529 in taxes. If the couple were unmarried and both had taxable income of $50,000, they would pay $11,127 each, or a total of $22,254. But a single person with taxable income of $100,000 would pay $26,522. As a result, marriage is beneficial, tax-wise, when one spouse works and the other does not; it is often detrimental when both spouses work.

There has been, as of yet, no truly equitable solution posed to the marriage dilemma: every conceivable system would offer marriage bonuses in some cases and marriage penalties in others.

Head of household

Under Section 1(b), an unmarried taxpayer with one or more dependents in their household may file taxes as a head of household. Heads of household pay less tax than equivalent single taxpayers, but they pay more tax than an equivalent married couple filing jointly.

Dependents

Anyone with income is liable for taxes on that income, even if they are listed as a dependent on someone else's tax return.

Minor children are always taxed independently on their income under Section 73, regardless of whether they are emancipated and regardless of whether they actually receive the income.

If children under 14 have unearned income (e.g. income from returns on investments), their income is taxed at the marginal rates of their parents under Section 1(g). The assumption behind this rule is that parents may be tempted to place assets in their children's names to avoid tax liability.

Corporations

Corporate taxes are levied by the schedule in Section 11. Most large corporations and all public corporations are classified as C corporations and are subject to corporate taxes. Smaller private companies can qualify as S corporations, which exempts them from corporate tax liability. However, all corporate distributions to shareholders are taxed regardless of whether the corporation has C or S status. In the case of C corporations, this means that profits passed on to shareholders are taxed twice: once as corporate income, and once as personal income. This double taxation problem is a major issue to investors when deciding how to structure a business.

Partnerships and LLCs

Partnerships are not taxed. Instead, their partners pay tax on their proportion of the profits of the entity, regardless of whether those profits are distributed or reinvested. This is known as pass-through or flow-through taxation. Limited liability companies (LLCs) with more than one member usually follow a similar tax structure; single-member LLCs are taxed as an extension of the owner.

The IRS offers check-the-box taxation for such entities, which allows the managers to decide whether to have their LLC taxed as a corporation or partnership by checking boxes on a form. By default, such entities are taxed as partnerships; in some situations, however, it is beneficial to have an entity taxed as a corporation.