What is Income Tax?
An income tax is a tax levied on the income of individuals or businesses (corporations or other legal entities). The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Taxable income is total income less allowable deductions. Income is broadly defined. Most business expenses are deductible. Individuals may also deduct a personal allowance (exemption) and certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits.
Income tax is charged to both people and businesses alike. In either case it is calculated on the amount of money that the person or business makes. In the United States, the tax system is based on a progressive scale. This means that the more you make, the higher percentage that you have to pay is. The highest rate is 38 percent while the lowest is zero percent.
Again, in most cases businesses and people are treated very similar in the eyes of tax law. If a business does not earn much money, then its tax liability will be less than one that might earn millions.
Overview of Federal Income Tax
In the United States, the Internal Revenue Service (IRS) is the revenue service by the federal government. This agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue. The IRS is responsible for collecting taxes and the interpretation and enforcement of the Internal Revenue Code.
It is obvious and essential that you must pay federal income tax regardless of where you live in the United States, in accordance with this, most states also have additional state income tax. However, states like Texas, Florida, Nevada, Washington, Wyoming, South Dakota and Alaska have no state income tax. Tennessee and New Hampshire only apply state income tax to interest and dividend income. Each state will collect taxes from you in one way or another. The states that do not charge income tax impose higher rates on the other things like Sales tax or Property tax.
The process of tax preparation is to prepare your tax return, often income tax return, often for a person other than the taxpayer, and generally for compensation. It may be done by the taxpayer with or without the help of tax preparation software and online services. Tax preparation may also be done by a licensed professional such as an attorney, certified public accountant or enrolled agent, or by an unlicensed tax preparation business. As United States income tax laws are considered to be complicated, many taxpayers seek outside assistance with taxes.
If you are paying your taxes very first time then it is obvious to arise bunch of questions in your mind about what to do, how to do, etc. There are certain things you need to do before you file your taxes. Filing your taxes does not need to be an intimidating process, you really do not need to worry about a wide variety of forms and tax laws, since computer software can help to simplify the entire process:
- Collect your Tax Documents.
- Determine your AGI.
- Review the Free File FAQs
- Choose your online Tax Assistant
- Efile with Free File.
- Use Direct Deposit.
- Pay Electronically.
Once you are done with the procedure, make sure you get the confirmation from the Internal Revenue Service regarding your efile has been submitted. Looking for an exemption is nothing but waste of time and energy as there cannot be any substitution for paying your federal tax, instead you can surely get some relaxations in terms of deductions in regards with your applicability.