As the saying goes, taxes are the only certainties that remain in life thus it is important to understand what taxes are all about. Below is an introduction of the taxation of income which includes how the taxable income is determined and the legal obligation of citizens to start paying taxes to the government.
Understanding Federal Income Tax
The federal income tax is the biggest source of funds that can be used to finance the federal government. The income tax is a progressive tax with is a tax that increases as the net taxable income of the tax payer also increases. Income taxes are very important.
Aside from raising revenue, taxes also serve to fund social programs through the allocation of resources, giving subsidy to people or government programs, redistribution of wealth and so on. The thing about taxes is that they are used by the government to fund its activities which will, in turn, improve the country. That is why it is a must that you understand the basic tax information in order to file your income tax on time.
What is gross income?
Gross income is the income that you make from any money-making source that you have. Your income is taxable unless excluded by the Tax Code and these include your compensation, interest, dividends, sale of assts, business income, estates, gambling winnings, alimony or payments of goods and services.
Tax payers are required to file for federal income tax return if their gross income is more than the value stated in the income threshold. The threshold usually varies on the age, marital status and residency of the tax payer.
What is adjusted gross income?
Certain adjustments are applied once the gross income has been totaled and the arrived figure is called the adjusted gross income. Some adjustments that are made are based on the retirement contributions, student loan interest, medical insurance, self-employment tax and even alimony. The adjusted amounts are deducted from the total income to arrive with the value of the adjusted gross income.
What are deductions and exemptions?
The adjusted gross incomes are then reduced by the standard deduction by personal exemption amounts. This varied depending on the filing status of the tax payer.
The itemized deductions are usually deducted from the adjusted gross income to find out the net income that will be subjected for the tax. The state and local income taxes are the most common itemized deductions.
Moreover, real property taxes, mortgage interests, investment interests as well as charitable contributions are also considered as itemized deductions.
However, several itemized deductions which include medical expenses, casualty losses and so on are deductible if and only if they exceed a particular percentage of the adjusted gross income.
Moreover, tax payers can also claim personal exemption amount if they have dependents like a spouse or children for that matter. Relatives can also become dependents but on limited circumstances. The itemized deductions are also removed for taxpayers who make high incomes.
How to determine taxable income?
The personal exemption amount and the itemized deductions are calculated against the adjusted gross income in order to be able to derive the taxable income. Tax tables are also applied to the taxable income to calculate the due of the tax.
Once the tax has been calculated, several credits like the status of dollar are also applied in order to reduce the amount of the tax. Credits including child care, foreign tax credits, credit for the elderly and adoption credits can also reduce the taxable income.
What are additional taxes?
There are several types of additional taxes and these taxes include the self-employment taxes, household employment taxes, retirement plans and so on that a taxpayer also need to deal with. One of the tax that almost all tax payer needs to deal with is the alternative minimum tax which is applicable if the tax payer’s alternative tax exceeds from the regular tax.
The tax payers are required to recompute the tax based on this system to make sure that the taxpayer is paying minimal amount of tax. This particular tax is similar to the flat tax the fact that this tax can be applied with limited adjustments.
What are capital gains?
Capital gains are dependent on the tax payer’s tax bracket. However, there are special favorable rules that are applicable to capital gains but in order to qualify, the asset that is sold must be a capital asset that has been held for more than one year. A capital asset includes items like bonds, stocks, properties and even car. Once the taxpayer has a loss on the sale of these capital assets, then the taxpayer can net the loss against the capital gains.
When to file for income tax returns?
The tax due for the income tax return is usually on the 15th of April the following year. However, the tax payers can still file their return on the extension as late as the 15th of October. For late filing, the IRS usually imposes penalties and interest but it is better than getting them hunting you down for failure to pay.
What Is A State Income Tax?
There are some states that also tax individual incomes. Taxpayers are subject to state income tax as stipulated by their state. In fact a lot of states consider the taxable income of people similar used by the federal government.