"As of January 29, 2018, the Internal Revenue Service (IRS) officially started accepted tax returns for the 2017 tax year. As a result, unique individuals with unique tax-filing methods, emerged out of the financial shadows. Who are these individuals? Well, they consist of those who are more than confident and skilled enough to file income taxes on their own; those who spent 6 months gathering necessary documentation and clicked “submit” at 12am EST, CST, MST, and PST on January 29th; and finally, those who will make the ultimate mad dash to their nearest H&R Block on April 15th with 5 minutes to spare until close!
No matter where you fall on the tax-filing spectrum, understanding what income taxes are, and why they are essential to the sustainability of the United States, is highly-encouraged. Moreover, while the process of taxation is confusing to a large majority of North Americans, there are a multitude of factors that not only affect how your personal income is taxed, but how the government determines taxable income rates, as well as how tax refunds are processed. So, let’s get started! What Are Income Taxes? Revenue that is earned throughout a calendar year, and that is charged by the federal government, is an income tax. Furthermore, income taxes include but are not limited to: dividends, earnings from self-employment (businesses), lottery winnings, royalties, and unemployment. Additionally, an increased number of Americans are becoming aware of how their tax dollars are dispersed and spent. Thus, according to the IRS, “the money collected from income taxes goes towards federal education programs, the military, welfare programs, and various agencies (such as the EPA and FDA).” Moreover, the IRS notes that when politicians decide that an increase in funding is needed for programs, a raise in income taxes can subsidize these costs. Breaking Down the “Income Tax” Individual Income Tax As gainfully employed individuals (should) know, earned income is not taxed at a full 100%. Deductions, interest paid, dental and medical bills, educational expenses, and more, are subtracted from gross income which determines taxable income. Moreover, the amount of taxable income determined is based on one’s income level. Likewise, because the United States operates under the progressive income tax system, “the more money you earn, the more taxes you have to pay.” Luckily, through the availability of credits, deductions, exclusions, and various other breaks, one can reduce income tax liabilities. Examining the progressive income tax further, the IRS also states that individual taxes are made based on a Pay-As-You-Go system, which means that income taxes are deducted from each paycheck every pay period also known as withholding tax. At the end of each year, if the payments made to IRS were not enough to cover the total income tax due, you owe the federal government and a payment to IRS MUST be made. However, if payments made to IRS were in excess, a repayment will be made to you in the form of an income tax. Tax Bracket The IRS notes that the highest tax rate paid on income is one’s marginal tax bracket. This bracket operates under a gradual tax schedule, which means: the more money made, the more taxes paid. As such, your tax bracket is dependent upon the amount of taxable income earned. A common goal among individuals is to remain in a lower tax bracket so that income is not taxed at a higher rate. State Income Tax Separate from federal tax laws, state taxes are collected by individual state governments. Because there is no uniform system under state taxes, these taxes will greatly vary depending on where one lives, works, and shops. Income Tax Forms The IRS issues several different types of income tax forms. As noted on the IRS’ website, the most commonly used tax return forms are:
With all things, knowing is half of the battle. Therefore, possessing a deeper understanding of income tax laws, and the method of processing tax returns, should help to alleviate confusion, and ultimately reduce unwanted stress.
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