Income Tax Basics
For numerous Americans, the thought of paying income taxes makes their spine tingle. While everyone knows that individual income taxes are paid to the IRS (Internal Revenue Service) each year, the process of taxation itself can be confusing to many. There are various factors that affect how personal income is taxed and how much you end up paying to the government (or receiving as a tax refund).
Above all else, it is important to understand that everybody has to pay income taxes in order to keep the country running. The United States needs a lot of money to function, and the funds that are collected from income taxes help finance the costs of education, the military, building and repairing roads, transportation, and many other public services.
Both individuals and companies are required to pay a portion of their income to the federal government. There are very few who are exempt from paying income taxes and filing a return.
While the federal government is responsible for constructing and implementing tax laws, the IRS is in charge of enforcing those tax laws to make sure that everybody is paying the proper amount. Tax forms are available for download online, or paper forms may be requested/picked-up. The IRS also provides assistance to taxpayers who have questions, concerns, or issues with their tax situation.
The amount of tax that you owe each year is based on your income level ? hence the name, income tax. Your adjusted gross income (AGI) determines which marginal tax bracket you fall into, and thus, which tax rate applies to you.
Currently, the United States has a progressive income tax system. That basically means that individuals who earn more money generally pay more in taxes. That being said, the IRS allows people to reduce their tax liability using various tax credits, tax deductions, tax exclusions, and other tax benefits.
While there are some people who think they are not required to pay income tax, that is very rarely the case. The majority of individuals are subject to the ‘Pay-As-You-Go’ system, which means that income tax is deducted from each paycheck and sent to the IRS. If more money was withheld from your wages than you owe in taxes that year, you will receive the overpayment as a tax refund. On the other hand, if too little was withheld from your wages, you will owe more to the IRS on April 15th.
If you are self-employed, the IRS expects you to pay Estimated Income Tax on a quarterly basis (typically in equal installments every 3 months). At the end of the year, if your payments were not enough to cover the total income tax due, you must pay the rest to the IRS. And also like other taxpayers, if you paid too much over the course of the year (more than what you owe in income tax), the IRS will send back your excess payment in the form of a tax refund.
While lawmakers are constantly debating on whether or not the United States should shift to less complicated, or even a ‘flat rate,’ income tax system, there is little reason to believe that will be implemented anytime soon.
Click HERE to file your income taxes online.