Income Tax
March 7, 2009
Most governments raise funds partially by taxing their citizens. These taxes are usually collected by taxing services or sales, while others are collected every 12 months, when a fiscal year ends. The latter annual tax is known as Income Tax and is often dreaded by a lot of people. Income Tax is raised by taxing an individual’s earnings, either trough their salaries or profits from investments. It is basically a progressive tax since it is based on an individuals reported income which usually rises at regular intervals.
The United States didn’t always have an official Income Tax. After years of being oppressed by corrupt corporate executives, Congressional leaders imposed a national Income Tax Law in 1941. This was primarily to make the greedy and affluent pay their share. This tax reform eventually trickled down to the working classes. Even though Income Tax is still progressive, a great many wealthy people and organizations reap th benefits of legal exemptions.
Fortunately, Income Tax cannot be charged on a net loss, but only on positive income. The Income Tax structure basically allows individuals to also earn a non-taxable income. This is based on the standard deduction amounts which are listed on the state and federal tax forms. An individual who has not earned more than the standard deduction amount will not be taxed.
Many individuals who earn wages have a problem in that the payroll department has to deduct a fixed percentage of income from each paycheck for the purposes of tax. State and federal Income Tax is deducted based on a particular calculation which is according to the individual’s dependency and marital status. Additional payroll deductions are made in order to cover union dues, voluntary contributions, insurance and Social Security (FICA) contributions. The amount which is then collected for state and federal Income Tax hs declared on an official form called the W-2. When income does not have such tax deductions, it has to be reported in another form called 1099.
The season for filing Income Tax is from January to 14 April of each year. This is when individual’s must declare their total income from wages earned and profits from investments. Standard deduction from the total is removed and the remaining amount is taxed as income. The government has a chart with the 1040 tax forms that provides the actual amount owed to the government. If the amount deducted by the payroll department is higher than this amount, the government issues a refund for the differing amount. In the event the W-2 amount is lower, the individual then owes a higher Income Tax and has to pay the Internal Revenue Service (IRS).
The average middle class tax payer has an Income Tax liability of about 15% on their gross income. Businesses and individuals are allowed to legally deduct a number of expenses connected to their professions which significantly reduces the amount payable as tax. Income Tax obligations can also be offset by making charitable donations. A trained accountant or tax preparation firm is essential for calculating Income Tax liabilities.
To sum it up, an Income Tax is basically a tax levied on the income of organizations or individuals. There are a number of Income Tax systems with different degrees of tax incidences. Income Tax can be proportional, regressive or progressive. Tax that is levied on organizations is called corporate income tax, profit tax or just corporate tax. While individual’s income taxes usually tax the total income of an individual after some standard deductions, corporate income taxes usually tax the net income of a company. This is calculated on the difference between expenses, additional write offs and gross receipts.
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