While there are different types of taxes, such as estate tax and excise tax that people need to pay, people usually use the term ‘taxes’ when they are talking about the federal income tax. This is mainly because this tax is the main source of revenue for any federal government, which also makes it one of the most important taxes.
Here in this guide, we will explain the meaning of federal income tax, and where it is allocated within the US budget. You will also get to learn about the people who pay the tax after reading this guide.
Understanding the meaning of Income Tax
The thing that you need to know is the federal income tax meaning. In simple terms, this tax is levied by a county, state, city, or even township where you live on your yearly income. This means that whatever income you receive is subject to federal income tax, and the tax rate varies in every country, and even in states where it is applicable.
How does the Federal Income Tax work?
The federal income tax in the U.S. is a “progressive” tax that is imposed on income at one or more rates, called marginal tax rates, resulting in every portion of income received within a year being in a different tax bracket and subjected to a different rate of tax. A progressive tax is a system where the taxes paid increase with an increase in taxable income. Presently, there are seven tax brackets with rates from 10 to 37%.
At the end of the year, your tax bracket, credits, deductions, and filing status all together determine your taxes, whether you owe or you get a refund.
Who is liable to pay income tax?
In the U.S., generally speaking, the majority of people pay income tax on their salaries; however, there are several other income sources. Other than the sources mentioned above, there are capital gains, rent, royalties, interest and dividends, business income, unemployment benefits, and even lottery winnings included in the tax. For a comprehensive understanding, check the list of taxable and non-taxable sources of revenue.
Income from all sources is subject to federal taxes, but not all of them are required to file a tax return. For an indication of how much you have to earn in order to file taxes, see here. You may not need to file, but it is often the case that you would want to do so to obtain either a refund or a tax credit if you are not required to file.
Why do we have to pay income taxes?
Along with knowing what is federal income tax, you should also be familiar with the answer to why you pay taxes. It is the law that people must pay taxes on their incomes to the federal and state governments, but still, why is this civic obligation so crucial?
Taxes provide the government at the federal, state, and local levels with a huge list of services and programs. The society would suffer a lot if there were no income taxes in the country; hence, the government’s taking taxes would not be the only source of the problem.
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