UNDERSTANDING INCOME TAX

Income tax is a kind of tax paid by those who are employed and self-employed which is based on their income. Income coming from pension or savings can also be covered by income tax. Personal income tax is often filed at the end of the year. Usually a taxpayer would have to prepare two forms: for those who have not paid enough and for those who have exceeded the amount to pay.

Aside from employment salaries, other sources of income which are subject to tax are individual salaries coming from investments,property, and trade. An individual’s income tax would rise along with persons reported income, making it a progressive tax. A progressive tax refers to a tax rate that increases when the taxable base increase.

To calculate your income tax, gather all possible sources of income, not only from earnings as an employee. Do not include housing benefits, tax credits, maternity or disabled living allowances. You could always check with IRS, their website or the local taxation department about what income are tax-free and taxable.

When the gross income is already calculated then you could deduct retirement plan payments, interest on early withdrawal from savings, education loan and similar payments which are called adjustments. The amount would be called the adjusted gross income.

Tax deductions should be removed from the adjusted gross income. It could be the standard deduction or itemized deductions. You could use whichever has higher deductions. Itemized deductions would include medical expenses, contributions made for charitable institutions, casualty loss, etc.

After the deductions, you could still check if you are still covered by personal exemptions or allowances. When all the possible deductions and benefits are already removed from the gross income, what you will have is the taxable income. This taxable income is then multiplied with the tax rate. Tax rate depends on the income and marital status.

It is common for employees or wage earners to receive a paycheck with tax deduction. Tax will be deducted from their salaries based on their marital and dependency status. Towards to end of the year or during the tax season, employers would be sending their employees, forms containing their wage earnings for the entire year and how much taxes were deducted from their salaries. IRS will then compute the taxes taken out of the employees paychecks. If an employee had overpaid their taxes, a check will be sent in a few weeks after filing the form or in some cases, directly deposited in her or his bank account.

The United States is known to have one of the most complex tax systems in the world.  And it can get more complex. There are different proposals that could simplify or make the taxation system more complicated. Since taxes concern us, we have to know more about it.