Basics About Income Tax
What is the federal income tax?
The federal income tax in America serves many purposes for the federal government; not only does it provide revenue, it also encourages certain behaviors while discouraging others, often through the use of credits and deductions. It is a progressive tax, meaning those who have more income generally owe more in taxes.
Who has to file federal income taxes?
Whether you have to file federal income taxes depends on your “gross income,” which is “all income from whatever source derived.” There are different minimum amounts that must be reached before taxes must be paid, and this number varies by the filing status, marital status, residence, and age of the individual.
What do I have to pay federal income taxes on?
A taxpayer pays federal income taxes on his “adjusted gross income” or AGI. You arrive at your AGI by making adjustments to your gross income based on whether you’re eligible for reductions like those for student loan interest, qualified moving expenses, and self-employment tax.
AGI is further adjusted by the standard deduction (or itemized deductions, such as medical expenses, mortgage interest, and employee business deductions, if you choose to itemize) and the personal exemption; the standard deduction and personal exemption are amounts that are set every year by the government and vary by filing status. Some itemized deductions can only be taken if they exceed a certain percentage of your AGI; if you are considering itemizing deductions, you should probably consult a tax professional to determine your best course of action.
Note that the standard deduction and personal exemption are phased out as income levels increase.
From your AGI as reduced by deductions and exemptions, you can determine the tax due based on tax tables provided by the Internal Revenue Service (IRS); you may then determine whether you’re eligible for credits that reduce tax liability. Commonly claimed credits include those for childcare, foreign tax, and earned income credits (EIC).
When do I have to file federal income taxes?
The general filing deadline for taxpayers is April 15, but if you are required to file quarterly payments (generally if you will owe more than $1,000 in a tax year), the deadlines are April 15 for the first payment, June 15 for the second payment, September 15th for the third payment, and January 15th of the following tax year for the final payment.
What is state income tax?
State income tax is collected by individual states on people who reside, work, and/or own property in that state. The following states do not charge income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. State formulas for determining taxable income are usually quite similar to the federal income tax method.