What is income tax? (with photos)

A W-2 wage and tax return is issued by an employer and indicates how much an employee earned in a year.

Almost all governments are funded, at least in part, by some form of taxation of their citizens. Most of these taxes are collected at the time of a sale or service, but others are collected at the end of a 12-month period called the tax year. One of these annual collections is the often-feared income tax. This is essentially a federal and state government bill for individual earnings through wages and investment profits. It is considered a progressive tax because the individual’s financial obligation increases with the level of reportable income.

In the United States, employers withhold a percentage of a person’s salary for income tax.

The United States has not always had an official income tax, however. After years of oppression at the hands of robber barons and corrupt executives, Congressional leaders of the early 20th century created a national income tax law in 1914, primarily to force the richest and greediest to pay their fair share. In the end, this reform would reach the middle and lower working classes. While the tax still remains progressive, many of the wealthiest companies and individuals benefit from a range of statutory exemptions.

Interest earned on bank accounts is generally considered income and is subject to tax.

Fortunately, income tax can only be levied on positive income, not a net loss. The basic tax structure allows individuals to earn a certain amount of non-taxable income. This is usually calculated by the standard deduction amount listed on federal and state tax forms. If an individual has not earned more than the standard deduction amount (usually a few thousand dollars), he or she owes nothing.

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A 1040 form requires a sworn signature.

The problem faced by wage earners, however, is that the payroll department is required to deduct a certain percentage of the money from each paycheck for tax purposes. Federal and state income tax is deducted according to a specific calculation based on the employee’s marital status and dependency status. Other payroll deductions are also made to cover Social Security contributions (FICA), insurance, union contributions, and any voluntary contributions. The amount collected is later reported on an official tax form called the W-2. Income without these tax deductions can be reported on another form called a 1099.

Income tax is levied on most forms of income and must be paid based on predefined calculation tables.

During tax season, from January to April 14, individuals must declare all of their total salary income and investment profits. The standard deduction is then subtracted from the total and the remainder is considered taxable income. A chart provided with official 1040 tax forms reveals the actual amount owed to the government. If the amount withheld by the payroll is greater than this number, the government will refund the difference. If the W-2 number is lower, the individual owes more income tax and must pay the IRS.

Many income tax forms can be completed online in the United States.

For most middle class taxpayers, the income tax liability is around 15% of their gross income. Individuals and corporations can legally deduct many expenses related to their occupations, which can significantly reduce this amount. Charitable donations can also be used to offset income tax obligations.

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