Benjamin Franklin once famously quipped that nothing is certain but death and taxes; yet what precisely constitutes income tax?
Income taxes are levied on individuals or corporations based on their total annual income, usually with progressive rates increasing as income does.
Your income tax liability depends on your total taxable income, which includes wages, tips, commissions and other forms of compensation; investment income like interest, dividends and stock options; rental income; business profit and unemployment compensation as well as fringe benefits (such as company-paid off-site gym membership or Christmas bonus); gambling winnings as well as miscellaneous income such as student loan interest payments or alimony payments.
The IRS calculates your taxable income by subtracting certain deductions from your adjusted gross income (AGI), with options to itemize or take the standard deduction available. Many states and localities also levy individual income taxes which are collected directly from individuals and typically represent less of their overall revenue than property or sales taxes or capital gains and loss taxes; furthermore some states impose rates based on capital gains and losses as well. State and local governments collected roughly $425 billion in individual income taxes during 2020 representing around 11.2 percent of their overall general revenue collection totalling about 12 percent overall!
Calculating your percentage tax payment involves dividing your total tax liability by your taxable income; this figure is known as your effective tax rate and it varies based on individual circumstances. By creating a strategic financial plan to minimize tax liabilities and decrease their effective tax rates.
Federal income tax rates are progressive, meaning they increase with your income. The top tax rate for 2017-18 is 37% but only applies to a portion of your taxable income; other portions are subject to lower rates of taxation.
States also collect individual income taxes, with 42 states and the District of Columbia collecting such levies in 2017. Of those states that collect such taxes, nine impose flat taxes; Hawaii offers the most extensive graduated rates system with 12 brackets; Maryland relied heavily on individual income taxes in 2017 for own-source revenue collection – in 2017 local governments in Maryland relied on individual income tax revenue as 29 percent of own source revenues; additionally Maryland enforces an alternative minimum tax (AMT), which operates similarly but includes exemptions, deductions and credits not present under its regular income tax structure.
Deductions can help lower your taxable income, and there are various types of deductions available. For example, health care expenses and costs related to prepay funeral insurance policies qualify for tax credits, while interest on student loans and mortgage insurance premiums can also be deducted; their amount depends on your adjusted gross income and increases over time to keep up with inflation.
Apart from these deductions, you may also qualify to claim state and local taxes as well as sales taxes, costs related to work such as home office expenses or security systems, as well as costs related to your work such as home office expenses or security systems. Depending on your circumstances and filing status, itemizing deductions is often preferable as it requires sorting through receipts and files to find eligible deductions – but their benefits make the effort worth while!
Utilizing tax brackets to calculate income tax can help you plan ahead and reduce the amount of taxes you owe each year. These brackets vary based on filing status and adjust annually to account for inflation – In 2023 there will be seven separate federal tax brackets for single filers and married couples filing separately.
United States of America employs a progressive individual income tax system. This means that as your taxable income rises, so too do tax rates; those in the highest bracket (37%) apply only when earning above $539,900.
But once you earn enough to move into a higher tax bracket, it doesn’t affect all of your earnings; the IRS only taxes income that exceeds its threshold threshold – for example a single filer who earns $9950 of taxable income in 2021 would face a 10% tax rate; but if they made $20,050 the following year they would incur a 12% rate instead.