A Guide to Federal Income Tax: Understanding the Basics
Introduction
Federal income tax is a tax levied by the United States government on individuals and businesses based on their income. It is one of the main sources of revenue for the federal government. In this article, we will provide a guide to federal income tax, outlining the basic principles, requirements, and tips to navigate the process properly.
What is Federal Income Tax?
Federal income tax is a tax that American citizens and businesses pay on their income, including wages, salaries, tips, and any income generated from investments. The tax is progressive, meaning the more income an individual earns, the higher the percentage of their income they are required to pay in taxes.
How is Federal Income Tax Calculated?
Federal income tax is progressive, which means that the percentage of the tax increases as the amount of income increases. The Internal Revenue Service (IRS) sets federal income tax rates annually and these rates are based on income brackets.
The income tax rates for the year 2021 are:
– 10% on taxable income between $0 and $9,950
– 12% on taxable income between $9,951 and $40,525
– 22% on taxable income between $40,526 and $86,375
– 24% on taxable income between $86,376 and $164,925
– 32% on taxable income between $164,926 and $209,425
– 35% on taxable income between $209,426 and $523,600
– 37% on taxable income over $523,600
Deductions and Credits
Taxpayers may also be eligible for various deductions and credits that can help to reduce their taxable income and potential tax liability. Some of the most common deductions and credits include:
– Standard or itemized deductions: Taxpayers can choose to take a standard deduction or an itemized deduction, depending on which provides them with the most significant tax benefit.
– Retirement account contributions: Contributions to a traditional individual retirement account (IRA) may be tax-deductible.
– Child tax credit: Taxpayers may be able to claim a tax credit for each qualifying child.
– Education credits: Taxpayers may be eligible for education credits if they’ve paid out-of-pocket expenses for higher education.
Filing Federal Income Tax
All taxpayers, including individuals and businesses, are required to file a federal income tax return every year. Taxpayers must file by April 15th of the year following the tax year (for example, 2020 taxes are due on April 15th, 2021).
The IRS offers several ways to file taxes, including:
– Filing paper forms by mail
– Filing electronically using tax software or online tax services
– Enlisting the help of a tax preparer or accountant
Conclusion
Federal income tax is a necessary part of life for all American citizens and businesses. Understanding how federal income tax works and the various deductions and credits available can help taxpayers reduce their tax liability and maximize their refund. It is important to keep in mind that federal income tax laws are subject to change, and taxpayers should stay up to date on the latest updates and changes to avoid any surprises come tax time.
Income tax is the predominant levy in the United States of America. The tax collected on income allows the federal government to fund wars, build parks and roads, perform public services, and pay for current expenditures that aim to maintain a healthy balance in society.
The income tax is a tax levied on the income or wages of all businesses and individuals. Although various income tax systems exist, the United States incorporates a progressive federal tax on the population’s earned income.
As stated before, the federal income tax is applied to both individuals and businesses who earn a salary or income. When the tax is enforced on businesses or corporations the tax is referred to as a corporate tax or profit tax. When the tax is levied on an individual, the individual income tax is a levy on the individual’s total income.
Although deductions or write-offs are available (given the fulfillment of specific requirements) the same tax on a business is only applied to the companies net profits (the difference between their gross income the total expenses and whatever additional write-offs are present.
The progressive tax system of the United States income tax attaches varied tax rates to individual earners. Those citizens who earn more income are taxed at a higher rates. Although the rates, and the qualifying salaries vary, typically the highest tax brackets are those individuals who currently earn over $350,000 per year. This salary is taxed at 35%, meaning 35% of their gross salary is collected by the federal government. In turn the lowest bracket is generally around 20%, and applies to those individuals who earn minimum wage or slightly more.
