United States
This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.
Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.
The national currency is the dollar (USD). In 2021, the average worker earned USD 62 954 (Secretariat estimate).
1.1. Central/federal government income taxes
1.1.1. Tax unit
Families are generally taxed in one of three ways:
As married couples filing jointly on the combined income of both spouses;
As married individuals filing separately and reporting actual income of each spouse; or
As heads of households (only unmarried or separated individuals with dependents).
All others, including dependent children with sufficient income, file as single individuals.
1.1.2. Tax allowances and tax credits
1.1.2.1. Standard reliefs
Basic reliefs: In 2021 a married couple filing a joint tax return is entitled to a standard deduction of USD 25 100. The standard deduction is USD 18 800 for heads of households and USD 12 550 for single individuals. This relief is indexed for inflation. More liberal standard deductions are available for taxpayers who are age 65 or older and taxpayers who are blind. Special rules apply to children who have sufficient income to pay tax and are also claimed as dependents by their parents.
Standard marital status reliefs: Married couples generally benefit from a more favourable schedule of tax rates for joint returns of spouses (see Section 1.1.3). There are no other general tax reliefs for marriage.
Relief for children: Low income workers with dependents are allowed a refundable (non-wastable) earned income credit. For taxpayers with one child, the credit is 34% of up to USD 10 640 of earned income in 2021. The credit phases down when income exceeds USD 19 520 (25 470 for married taxpayers) and phases out when it reaches USD 42 158 (48 108 for married taxpayers). The earned income threshold and the phase-out threshold are indexed for inflation. For taxpayers with two children, the credit is 40% of up to USD 14 950 of earned income in 2021. The credit phases down when income exceeds USD 19 520 (25 470 for married taxpayers) and phases out when it reaches USD 47 915 (53 865 for married taxpayers). For taxpayers with three or more children the credit is 45% of up to USD 14 950 of earned income. The credit phases down when income exceeds USD 19 520 (25 470 for married taxpayers) and phases out when it reaches USD 51 464 (57 414 for married taxpayers).
Since 1998, taxpayers are permitted a tax credit for each qualifying child under the age of 17. For 2021 the age was extended to include otherwise qualifying 17-year-old children. In 2021 the maximum credit is USD 3600 for children under 6 and 3000 for children between 6 and 17 (inclusive). The refundable (non-wastable) child credit for 2021 is 100 percent of the amount of credit in excess of tax liability and is (for the first time) not limited to taxpayers with earnings. Certain additional adjustments related to timing of payments and income related to COVID relief in 2021 were introduced; they are described in Section 4.
Other dependent tax credit: For qualifying dependents other than qualifying children for whom a child tax credit was claimed, there is a USD 500 non-refundable credit. The Taxing Wages calculations do not include the other dependent tax credit.
Phase out of child tax credit and other dependent tax credit: The maximum credit is reduced for taxpayers with income in excess of certain thresholds. The portion of the child credit in excess of USD 2 000 is reduced by USD 50 for each USD 1 000 by which modified aggregate gross income exceeds USD 150 000 for married taxpayers filing jointly (USD 112 500 for head of household filers and 75 000 for all other filers), with modified rules for large families. The remainder of the child tax credit plus the other dependent tax credit is reduced by USD 50 for each USD 1 000 by which modified aggregate gross income exceeds USD 400 000 for married taxpayers filing jointly (USD 200 000 for single and head of household taxpayers).
Relief for low income workers without children: In 1994 and thereafter, low income workers without children are eligible for the earned income credit. In 2021 low income workers without children are permitted a non-wastable earned income credit of 15.3% of up to USD 9 820 of earned income. The credit phases down in 2021 when income exceeds USD 11 610 (17 550 for married taxpayers) and phases out completely when income reaches USD 21 430 (27 370 for married taxpayers). In 2021, this credit is available for taxpayers at least 19 years old who are not full-time students.
Relief for social security and other taxes. In 2021, the withholding rate for Social Security taxes and Medicare for employees is 7.65%. The earned income credits described above are sometimes considered an offset to Social Security and Medicare contributions made by eligible employees. Furthermore, only a portion of Social Security benefits are subject to tax.
1.1.2.2. Main non-standard reliefs applicable to an AW
The basic non-standard relief is the deduction of certain expenses to the extent that, when itemised, they exceed in aggregate the standard deduction. For the purposes of this Report, it is assumed that workers claim the standard deduction. The principal itemised deductions claimed by individuals where the standard deduction is not being claimed are:
Medical and dental expenses that exceed 7.5% of income (10% in 2020);
State and local income taxes, real property taxes, and personal property taxes are capped at USD 10 000 per return;
Home mortgage interest on USD 750 000 of qualified residence loans;
Investment interest expense up to investment income with an indefinite carry forward of disallowed investment interest expense;
Contributions to qualified charitable organisations (including religious and educational institutions);
Casualty and theft losses to the extent that each loss exceeds USD 100 and that all such losses combined exceed 10% of income;
Miscellaneous expenses such as gambling losses, casualty and theft losses of income-producing property, and impairment related work expenses of disabled persons to the extent that, in aggregate; they exceed 2% of income.
In 2019 based on preliminary statistics,1 the most recent year for which such statistics are available, the 13% of taxpayers with income between USD 50 000 and USD 100 000 (the AW range) who itemised their deductions claimed average deductions as follows: taxes paid, USD 6 909; charitable contributions, USD 5 241; home mortgage interest expense, USD 9 785;
Contributions to pension and life insurance plans. No relief is provided for employee contributions to employer sponsored pension plans or for life insurance premiums. However, tax relief is provided for certain retirement savings.
1.1.3. Tax schedule
There is a 3.8% tax on the lesser of certain net investment income or income in excess of USD 200000 (USD 250 000 for joint returns). Net investment income includes interest, dividends, capital gains, rental and royalty income, and income from businesses trading financial instruments.
Beginning in 2018, owners of sole proprietorships, partnerships, S corporations, and some trusts and estates are eligible to deduct up to 20 percent of qualified business income (QBI). QBI is subject to limitations, depending on the taxpayer’s taxable income, based on factors that may include the type of trade or business, the amount of wages paid by the business and the unadjusted basis of qualified property held by the trade or business.
1.2. State and local income taxes
1.2.1. General description of the system
The District of Columbia and 41 of the 50 States impose some form of individual income tax.2 In addition, some local governments (cities and counties) impose an individual income tax, although this is not generally the case. State individual income tax structures are usually related to the federal tax structure by the use of similar definitions of taxable income, with some appropriate adjustments. This linkage is not a legal requirement but a practical convention that functions for the convenience of the taxpayer who must fill out both federal and State income tax returns.
The Taxing Wages calculations assume that the average worker lives in Detroit, Michigan. The state of Michigan permits a personal exemption of USD 4 900 for the taxpayer, the taxpayer’s spouse and each child, and taxes income at the rate of 4.25%. Michigan allows taxpayers who are eligible to claim the federal earned income tax credit to claim a Michigan earned income tax credit. The Michigan earned income tax credit is a refundable (non-wastable) credit equal to 6% of the federal earned income tax credit.
The city of Detroit permits a personal exemption of USD 600 and taxes income at the rate of 2.4%.
2.1. Employees’ contributions
2.1.1. Pensions
In 2021, the rate for employee contributions is 7.65% (6.2% for old age, survivors, and disability insurance, and 1.45% for old age hospital insurance). The 6.2% rate applies to earnings up to USD 142 800. Beginning in 1994, there is no limit on the amount of earnings subject to the 1.45% rate. There is an additional 0.9% tax on employee wages and salaries that exceed USD 200 000 (USD 250 000 for joint returns) as the additional hospital insurance tax on high-income taxpayers. The additional tax on wages and salaries is subject to withholding (but without regard to the earnings of the spouse) when wages from a particular job exceed USD 200 000 per year. These thresholds are not indexed for inflation.
2.2. Employers’ contributions
2.2.1. Pensions
The rate for employers’ contributions is 6.2% on earnings up to USD 142 800 and 1.45% of all earnings (without limit).
2.2.2. Unemployment
Employers are required by the federal government to pay unemployment tax of 6% on earnings up to USD 7 000. Taxes are also paid to various state-sponsored unemployment plans which may generally be credited against the required federal percentage. In 2020 the estimated average unemployment insurance tax rate in Michigan was 2.94% of the first USD 9 000 of wages. The Taxing Wages model considers that the Federal government allows employers to take a credit for state unemployment taxes of up to 5.4%, resulting in a net Federal tax of 0.6% on earnings up to USD 7 000.
In December 2017, Congress passed and the President signed the Tax Cuts and Jobs Act – the most significant change in U.S. tax law in a generation, incorporating change to the taxation of individuals and businesses. For individuals, the Act temporarily lowers income tax rates, increases the standard deduction, increases the child tax credit, and adds a credit for other dependents. The Act also temporarily eliminates some deductions, credits and exemptions for individuals. In addition the individual alternative minimum tax (AMT) exemption and phase-out thresholds are temporarily increased so that fewer taxpayers are subject to the AMT. Pass-through entities that are generally taxed at the individual level only and may be eligible for a new temporary deduction. These temporary provisions expire at the end of 2025. In addition, inflation adjustments of amounts and thresholds are changed to be determined by the chained consumer price index. Finally, there are substantial changes in business taxation, many that are permanent, such as lowering the top corporate tax rate from 35 to 21 percent and moving the U.S. international tax system towards a territorial system.
In December 2020, Congress passed, and the President signed, the American Rescue Plan which increased the generosity of many personal credits for 2021 only.
4.1. Changes to labour taxation due to the COVID pandemic in 2020 and 2021
Families First Coronavirus Response Act enacted 18 March 2020 provides employers with less than 500 employees with a refundable tax credit to offset the cost of providing a worker with paid sick and family leave through 2020. The Act caps the amount of qualified sick leave wages taken into account for each employee at USD 511 per day for 10 work days. Similarly, the family leave credit offsets USD 200 per day of wages for employees who must care for a loved one or whose child is home because of a school or day care closing. Self-employed workers would also qualify for the same level of refundable sick and family leave tax credits to offset wages. Businesses can retain and access funds that they would have otherwise paid in the employer’s Social Security taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form. Employers with U.S. Small Business Administration Loans are not eligible for employee retention credit.
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted on 27 March 2020 in response to the pandemic. Among other provisions, there is a tax credit paid in general to citizens, the so-called 2020 Recovery Rebate Credit (RRC). While the RRC can be claimed on the 2020 tax return filed in 2021, an advance payment (Economic Impact Payment, EIP) of the credit was made in 2020 of USD 1 200 per taxpayer (USD 2 400 for married couples) plus USD 500 per child under age 17. While there is no cap on the RRC, it phases out at 5 percent of Adjusted Gross Income (AGI) in excess of USD 150 000 for married couples, USD 112 500 for head of household, and USD 75 000 for all other filers.
The CARES Act also delays the timing of required federal tax deposits for certain employer payroll taxes and self-employment taxes incurred between March 27, 2020 (the date of enactment) and December 31, 2020. Fifty percent of the deferred amount has to be paid by 31 December 2021 and the remainder by 31 December 2022. These taxes include the 6.2 percent Social Security tax for wage earners and comparable 6.2 percent Self-Employment Contributions Act tax due on net earnings from self-employment.
The CARES Act also provides businesses with a refundable Social Security tax credit for 50 percent of qualified wages up to USD 10 000 for each employee for qualifying calendar 2020 quarters during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first USD 10 000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from 13 March 2020 through 31 December 2020. Employers with Small Business Administration Loans under the CARES Act are not eligible for the employee retention credit.
Finally, for 2020, taxpayers taking the standard deduction can deduct USD 300 of cash contributions to charities. The act also increased the limitations on deductions for charitable contributions by individuals who itemize. For individuals, the 50% of adjusted gross income limitation was raised to 100% for cash gifts in 2020.
The Consolidated Appropriations Act of 2021, (CAA) enacted 27 December 2020, provides an additional 2020 Recovery Rebate Credit (additional 2020 RRC) of USD 600 per eligible individual (USD 1 200 for married couples) plus USD 600 per child under age 17. While the credit can be claimed on 2020 tax returns filed in 2021, an advance payment of the additional 2020 RRC (second round Economic Impact Payment) was made beginning in 2020. While there is no cap on the additional 2020 RRC, it phases out at 5 percent of Adjusted Gross Income (AGI) in excess of USD 150 000 for married couples, USD 112 500 for head of household, and USD 75 000 for all other filers.
The CAA extended the paid sick leave and family leave tax credits enacted by the Families First Coronavirus Relief Act through 31 March 2021.
The CAA also allowed taxpayers taking the standard deduction to deduct USD 600 of cash contributions to charities in 2021. The CAA extended the 100% of AGI limit on cash charitable contributions enacted in the Families First Coronavirus Relief Act through 2021.
The American Rescue Plan Act (ARP) enacted 21 March 2021 provides a 2021 Recovery Rebate Credit (2021 RRC) of USD 1 400 per eligible individual (USD 2 800 for married couples) plus USD 1 400 per dependent. While the credit can be claimed on 2021 tax returns filed in 2022, an advance payment of the 2021 RRC (third round Economic Impact Payment) was made in 2021. The credit phases out proportionately beginning at USD 150 000 of AGI and is fully phased out at USD 160 000 of AGI for married couples, USD 112 500 to USD 120 000 for head of household, and USD 75 000 to USD 80 000 for all other filers.
The ARP extended the paid sick leave and family leave tax credits enacted by the Families First Coronavirus Relief Act through 30 September 2021.The ARP excluded from gross income subject to tax the first USD 10 200 per recipient of unemployment compensation received in 2020 for taxpayers with AGI below USD 150 000.
The ARP made the Child Tax Credit (CTC) fully refundable increased to age 17 the maximum qualifying age and increased the maximum value of the credit for most taxpayers for taxable year 2021. Half of the amount of the 2021 CTC is distributed in monthly advance payments over the second half of 2021 ahead of filing 2021 returns in 2022. A taxpayer’s Federal income tax will be increased, dollar-for-dollar, if their total CTC advance payments during 2021 exceed the amount of the CTC to which they are eligible for that year. However, safe harbour rules may reduce the additional income tax owed depending on the taxpayer’s modified AGI.
See Section 1.1.2.1 for a complete description of parameters and income thresholds.
5.1. Identification of an AW at the wage calculation
The AW is identified from monthly data compiled from establishment questionnaires covering more than 40 million non-agricultural full- and part-time workers. Beginning in March 2006, data on average weekly hours and average hourly earnings cover all employees rather than solely production or non-supervisory workers. To obtain average annual wages, the product of average weekly hours (including overtime) and average hourly earnings (including overtime) is multiplied by 52 and is adjusted to reflect a full-time equivalent worker. The AW is estimated to be USD 59 517 for 2020.
5.2. Employer contributions to private social security arrangements
Employers commonly contribute to private pension plans (both defined benefit and defined contribution), health insurance and life insurance. Data for these contributions are available only on a total workforce basis. It is not possible to state with accuracy the levels applicable to the AW. The following are estimates for 2020 for employees in private industry:
The equations for the US system in 2021 are mostly calculated on a family basis. There is a special function EIC which is used to calculate the earned income credit. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.