What is Income Tax?
Income tax is a government imposed obligation for reporting and paying the required taxes for earnings during a tax year. Many different tax structures for income tax may be calculated, such as progressive, proportional, or regressive. Income tax is also levied upon business and companies, which is usually referred to as the corporate tax.
Income Tax requirements in the United States
In the United States, income tax is collected by the federal government, most state and local governments. United State citizens are responsible for paying federal income taxes no matter where they reside in the world and as such, may be subject to double taxation if they earn income in another foreign nation.
1. Basis for determining Income Tax
Every income earner is placed within an income bracket, which determines the rate for which they will be taxed. The lowest income earners, who earn between $0 and $8,500 in a taxable year, are subject to a 10% rate for income tax. The highest tax bracket is for income over $379,151, which is taxed at a rate of 35%.
The income is taxed on a graduated scale, which means earnings in between certain amounts are taxed at different rated. For example, an individual who earns $34,000 in one year will be taxed at 10% for the first $8,500 earned and 15% for the income between $8,500 and $34,000.
2. Tax filing classifications
A taxpayer may file their taxes and must define themselves as one of 4 different types: Single, married filing jointly, married filing separately, or head of household. The primary effect of the classification system is to determine the amount of the standard deduction the taxpayers may claim against their income. Deductions are credits against their income that act to lower the overall tax liability. For example, in 2009, a single tax filer could claim a $5,700 standard deduction, while a married couple could claim an $11,400 deduction with a $3,600 personal exemption.
3. Self-reporting requirement of Income Tax
All taxpayers are required to self report their income to the IRS. This is what is typically considered “doing ones taxes” or the services that are provided by tax preparation services. Following the required forms, a taxpayer is required to report all income derived from work, realized gains of the sale of assets (capital gains), and any other factors that determine ones income.
4. Exemptions and deductions
When determining the income tax required, a taxpayer is allowed to count certain funds received as non-income or certain costs as deductions. The following are some of the most common exemptions and deductions taken by individual taxpayers:
– Dependents Tax Credit and Child Tax Credit – Interest for property taxes paid by a homeowner – Local and state income taxes – Charitable gifts
Other sources of Income Tax
The usual source of income for most taxpayers is their yearly paycheck from their job. However, many other sources of income may count towards your tax filing. Capital gains from the sale of property must be counted as income. Also included are many government benefits, including unemployment income, inheritances, and certain gifts. Check with a tax professional to ensure you are not underreporting your taxes to protect yourself from an audit by the IRS.