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The US Progressive Tax System

The United States uses a progressive tax system, which means that as your income increases, the rate of tax you pay on higher portions of your income also increases. These portions are known as “tax brackets.”

Federal Income Tax Brackets

For the 2025 tax year, there are seven federal tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

It is a common misconception that getting into a higher tax bracket means all your money is taxed at that rate. In reality, only the amount above the threshold of the previous bracket is taxed at the new, higher rate.

Standard Deduction

Most Americans take the “Standard Deduction,” which is a flat amount you can subtract from your gross income before you calculate your tax. For 2025, the standard deduction for single filers is approximately $14,600.

FICA Taxes (Social Security and Medicare)

In addition to federal income tax, employees must pay FICA taxes:

• Social Security: 6.2% of your gross income (up to a certain limit).
• Medicare: 1.45% of your gross income (no limit).

Budgeting Tips for US Residents

Living in the USA involves managing various costs of living. A common rule of thumb is the 50/30/20 rule:

1. 50% for Needs: Rent, groceries, utilities, and insurance.
2. 30% for Wants: Dining out, entertainment, and hobbies.
3. 20% for Savings: 401(k) contributions, emergency funds, and debt repayment.

Retirement Planning

• 401(k): An employer-sponsored retirement account. Often, employers will match a portion of your contributions.
• IRA (Individual Retirement Account): A personal savings account that provides tax advantages for retirement savings.