One of the greatest defining moments of a new professional life is getting to know the tax structure. By the time I got a hang of it in India, I was packing bags to head to the US. Now as I plan to begin another stretch of professional life, I try to understand the tax structure here.
There is no CTC here, which in India is often used to dupe fresh, innocent graduates into a low paying job. In the US people talk in terms of the base salary. Except for a few deductions, the base salary divided by 12 is what you can expect in your monthly pay cheque. The deductions are as follows-
a) Federal tax
b) State tax
All of the above are calculated as a percentage of the base salary. However, just like India, you can avail of some tax incentives. For example, if you decide to save some money for after your retirement, you can invest in the 401K plan. The taxes are then calculated on the base pay less the amount that you invest in the 401K plan. On a side note, unlike India, the money alloted to the 401K plan is usually invested in mutual funds. For example, the company that I work for will hire a mutual fund operator such as Liberty, Vangaurd or some other which will then lay out a variety of mutual funds in which I can choose to invest my 401K money. Whether that money grows or not is subject to the performance of the mutual funds I choose. If I withdraw money that I had earmarked as money invested in the 401K, the fund operator will charge a penalty. In India, the pension fund is something very similar. The money is taken out automatically from the salary and is invested in a fund. This fund however, is a fixed interest rate bond and hence does not have a risk associated with it. In this case, premature withdrawl of money is penalized by the government. There are other ways in which the the taxable income can be reduced which I am on my way to learning. I will share the information as it comes along.