What Is Income Tax?

I🐭ncome tax is a type of tax governments impose on the income that businesses and individuals generate. By lꦆaw, taxpayers must file an income tax return annually to determine their tax obligations.

Income taxes are a source of revꦅenue for governments. They are used to fund public services and pay government obligations. In addition to the federal government, many states and local jurisdictions also levy income taxes.

Certain investments, like 澳洲幸运5开奖号码历史查询:housing authority bonds, are exempt from income taxes in some cases.

How Income Tax Works

The Internal Revenue Service (IRS) collects taxes and enforces tax laws in the United States. The IRS employs a complex set of rules and regulations regarding reportable and taxable income, deductions, credits, etc. The agency collects taxes on all forms of income, such as wages, salaries, c🍰ommissions, investments, and business earnings.

The personal income tax that the government collects can help fund government programs and services, such as Social Seไcurity, national security, schools, and roads🎐.

History of Income Tax

The United States imposed the nation’s first income tax in 1862 to help finance the Civil War. After the war, the tax was repealed, but it was reinstated after the passage of the Revenue Act of 1913. That same year, 澳洲幸运5开奖号码历史查询:Form 1040 was introduced.

Most countries, including the U.S., employ a 澳洲幸运5开奖号码历史查询:progressive income tax system in which higher-income earners pay a higher tax rate compared with their lower-income counterparts. The idea behind progressive tax is that those who earn high incomes can afford to pay more tax. For 2023 and 2024, 澳洲幸运5开奖号码历史查询:federal income tax rates range from 10% to 37%.

Types of Income Tax

Individual Income Tax

Individual income tax is also referred to as personal income tax. This type of income tax is levied on an individual’s wages, salaries, and other types of income. This tax is usually a tax that the state imposes. Because of 澳洲幸运5开奖号码历史查询:exemptions, deductions, and credits, most individuals do not pa🔯y taxes on all of their income.

The IRS offers a series of income tax deductions and tax credits taxpayers can use to reduce their taxable income. While a deduction can 澳洲幸运5开奖号码历史查询:lower your taxable income and the tax rate used to calculate your&nbs𒉰p;tax, a tax credit reduces your income tax 🐼;obligation.

The IRS offers tax deductions for healthcare expenses, investments, and certain education expenses. For example, if a taxpayer earns $100,000 in income and qualifies for $20,000 in deductions, the taxable income reduces to $80,000 ($100,000 - $20,000 = $80,000).

澳洲幸运5开奖号码历史查询:Tax credits help reduce the taxpayer’s tax obligation or amount owed. They were created primarily for middle-income and lower-income households. To illustrate, if an individual owes $20,000 in taxes but qualifies for $4,500 in credits, their tax obligation reduces to $15,500 ($20,000 - $4,500 = $15,500).

Business Income Tax

Businesses also pay income taxes on their earnings; the IRS taxes income from corporations, partnerships, self-employed contractors, and small businesses.

Depending on the business structure, the corporation, its owners, or shareholders report their business income and then deduct their operating and capital expenses. Generally, the difference between their business income and their operating and capital expenses is considered their taxable business income.

State and Local Income Tax

All but 澳洲幸运5开奖号码历史查询:nine U.S. states impose personal income taxes on their residents. The ones that don't are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Keep in mind, though, that it may not necessarily be cheaper to live in a state that does not levy income taxes. This is🔜 because states oftenജ make up the lost revenue with other taxes or reduced services.

What's more, other factors determine the affordability of living in a state, including healthcare, cost of living, and job opportunities. For instance, Florida residents pay a 6% sales tax on goods and services, while the state sales tax in Tennessee is 7%.

To further complicate matters, 澳洲幸运5开奖号码历史查询:state൲s continually adjust their tax systems in ways both large and small, makin🦩g it impossible to predict what sort of tax burden their residents will face in the years to come.

The Bottom Line

All taxpayers pay federal income tax. Depending on where you live, you may have to pay state and local income taxes, too. The U.S. has a progressive income tax system, which means that higher-income earners pay a higher tax rate than those with lower incomes. Most taxpayers do not pay taxe𓄧s on all of their income, thanks to exemptions and deductions.