The Facts on Personal Tax

Personal tax, also known as income tax, is a vital part of any country’s economic system. It is the tax that individuals pay on their income, including their salary, wages, tips, commissions, and bonuses. The money collected from personal tax is used to fund various government programs, such as healthcare, education, infrastructure, and defense.

In this article, we will explore the essential facts on personal tax, including its history, types, rates, exemptions, deductions, and credits. We will also provide updated information on the topic using government resources to help you better understand this critical aspect of your financial obligations.

The History of Personal Tax

The concept of personal tax is not a new one, and taxation of personal income has been around since ancient times. However, it is only in the modern era that personal income tax has become an integral part of every country’s revenue system.

The first modern income tax law was enacted in Britain in 1842, followed by the United States in 1861 to finance the Civil War. Today, almost every country has some form of personal income tax, and the rules and regulations governing it differ from country to country.

Types of Personal Tax

There are two main types of personal tax: progressive and flat tax. Progressive tax is the most common form of personal tax, where individuals earning more pay a higher percentage of tax on their income. The rationale behind this is that those who earn more can afford to pay more and should contribute more to the government.

Flat tax, on the other hand, is a fixed percentage of tax that all individuals, regardless of their income, pay. It is relatively rare and is often found in countries with a more laissez-faire economic system. Flat tax is generally seen as more regressive, as it tends to burden the poor more than the rich.

Rates of Personal Tax

The rates of personal tax vary from country to country, and even within countries, the rates differ based on an individual’s income level. In the United States, for example, the federal income tax rates range from 10% to 37%, with the top rate applying to those earning over $518,400 per year.

In the United Kingdom, the rates of income tax range from 20% to 45%, with the top rate applying to those earning over £150,000 per year.

Exemptions

Most countries offer certain exemptions from personal tax, either based on an individual’s earnings or other factors such as age, disability, or dependents. In the United States, for example, individuals can claim a standard deduction, which reduces their taxable income. As of 2021, the standard deduction is $12,550 for individuals and $25,100 for married couples.

The United Kingdom offers a Personal Allowance, which is the amount of income an individual can earn before they start paying income tax. As of 2021, the Personal Allowance is £12,570.

Deductions

Deductions are expenses that can be subtracted from an individual’s taxable income, reducing the amount of tax they owe. The types of deductions available vary from country to country, but some common ones include mortgage interest, charitable donations, and business expenses.

In the United States, individuals can itemize deductions or claim the standard deduction, depending on which option results in a lower tax bill. Itemized deductions include state and local taxes, medical expenses, and certain work-related expenses.

In the United Kingdom, individuals can claim deductions for certain expenses related to their job, such as travel, uniforms, and equipment.

Credits

Credits are a type of tax relief that reduces the amount of tax an individual owes, rather than reducing their taxable income. Credits are often targeted at specific groups or activities, such as parents, students, or energy-efficient investments.

In the United States, some common tax credits include the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit for college expenses.

The United Kingdom offers tax credits for families with children, those with disabilities, and those who work but have low incomes.

Conclusion

Personal tax is an essential part of any country’s economic system, and understanding its concepts and regulations is vital for any individual. By knowing the types of personal tax, rates, exemptions, deductions, and credits, individuals can better manage their finances and ensure they comply with their tax obligations.

This article provided an overview of the essential facts on personal tax, using updated information from government resources. While personal tax regulations may differ based on country or state, the underlying principles remain the same. By being aware of these principles and staying up to date with any changes, individuals can confidently navigate the world of personal taxation.

Personal tax in the United States involves federal, state, and local income tax. Every time you receive a pay check from employer you have taxes taken out. These taxes are based on your gross annual income. The federal income tax is a progressive tax with increases in the percentage of taxable income for different levels of income.

The federal tax code for 2011 sets out the personal tax as follows:

INCOME TAX RATE

$0 – $8,500 10%

$8,500 – $34,500 15%

$34,501 – $83,600 25%

$83,601 – $174,000 28%

$174,001 – $379,000 33%

This means that if you make $100,000 a year you will be taxed 10% for the first $8,500; 15% for your second $26,000; 25% for the next $49,000; and 28% for the last $16,400. That means that your total taxable income for that $100,000 will be $21,542.

Even though this is the amount that you will be taxed over the course of the year it does not necessarily mean that it is the amount that the government is entitled to. The federal tax code is riddled with numerous tax exemptions and tax deductions.

Tax deductions are expenses that a tax payer incurs over the course of a tax year that the federal government allows to be deducted from annual income. A tax exemption is when is when you are permitted to reduce your taxable income.

When your are filing your personal tax you can claim exemptions for you, your spouse and your dependent family members. The standard tax exemption is $3,650 per exemption. There are a number of requirements in order to claim a tax exemption. An exemption from your personal tax is essentially a benefit that is bestowed up on the taxpayer for each person in their family who is dependent on that individual.

If you are the head of your household, you are permitted–so long as certain requirements are met–to an exemption for your spouse and your children. This means that if you are the head of you household, are married, and have two children who qualify as dependents then you are eligible for $13,000 in tax exemptions. So, as in the previous example, if your income is $100,000 your income, for tax purposes, will be reduced to $87,000.

In addition to tax exemptions you are permitted tax deductions. You have two options when discussing tax deductions. You can either file a standard tax deduction, which allows a specific deduction from your income based on your specific status, or you can take an itemized deduction which allows you to deduct expenses and items from a list of deductions supplied by the IRS.

There are a variety of ways to reduce your personal tax. This includes tax avoidance, tax shelters and a number of other ways. When you are looking to reduce your personal tax, it is important to discuss your financial portfolio with an accountant or a tax lawyer to help you claim as many deductions and exemptions as possible and reduce your tax burden.