With the exception of tax-exempt institutions, such as charitable institutions and pension . funds (which suffer no taxes), individuals and corporations in the United States are taxed in a similar fashion, so we can combine our discussion of the two. The name of the Internal Revenue Service (IRS) tax form that individuals have to file is feared by every U.S. tax payer: it is the infamous Form 1040.
Earned income or ordinary income is subject to both federal income taxes and state income taxes. There are, however, some deductions that taxpayers can take to result in lower taxable income. Most prominently, in the United States, individuals who itemize their deductions can reduce their taxable income through mortgage interest payments. (This does not extend to other kind of interest payments, so mortgage borrowing—rather than, say, car loan borrowing—is often the best choice in terms of after-tax effective interest costs for many individuals.) Further, with some restrictions, individuals may deduct other expenses, such as some educational expenses and certain retirement savings (specifically, through contribution to an individual retirement account, such as an ordinary I.R.A. or a 401-K). (These are only tax-advantaged, not tax-exempt. Most contributions are income-tax exempt, but the IRS will collect taxes when the money is withdrawn in the future.) Individuals can also carry forward losses or deductions that they could not legally deduct in the current year into future years.
Corporations are treated similarly, but often more generously by the tax code: they are generally allowed to deduct all interest, not just mortgage interest, and many corporations enjoy a plethora of preferential tax exemptions and loopholes, too numerous to list in just one post and ever-changing. Unlike individuals, corporations that have losses or extra deductions can even receive a refund for taxes paid in the most recent three years. This is not necessarily unfair—after all, corporations are just entities owned by individuals. Just as your car is not paying the car tax the DMV imposes—you, the owner, are paying the car tax —taxing corporations is just a different mechanism of taxing the individuals who own the corporation.
After you have computed your taxable income, you must apply the appropriate income tax rates. Income tax rates for individuals depend on your marital status and are usually progressive—that is, not only do you have to pay higher taxes when making more money, you have to pay increasingly higher taxes when making more money. (They are roughly progressive for corporations, but not perfectly so.)