What is an income tax?
Income tax is defined as an annual tax that government imposes on individual or entities based on financial income or profits. By law, the entities or individuals must file an income tax return every year to identify that they owe any taxes or eligible for any tax refund. This income tax is the key sources of funds for the government to serve the public.
The taxes are collected in different forms of income like wages, salaries, business earnings, investments etc.
Individual income tax:
The tax paid by the individual based on the gross income. The income tax is determined by subtracting mortgage interest, a portion of medical and dental bills, education expenses and several others payments.
Business income tax:
The tax paid by the business entities based on the income and profits. The corporations, partnerships, self-employed contractors and small businesses are considered as the business entities. The business income is reported and then operating and capital expenses to determine taxable business income.
Based on the country and state they charge income tax and it may vary from county to country and state-to-state. The income tax can be charged on the property and sales too.
Other taxable incomes:
- Interest on income.
- Short-term capital gains/losses.
- Long-term capital gains/losses.
- Ordinary dividends.
- Qualified dividends.
- Passive income.
The tax deduction is raised from expenses. It helps to lower the tax bills by reducing the portion of adjusted gross income, which is the main source of the taxation. The tax deduction is divided into two types above-the-line and below-the-line deductions and deduction of tax are done on the basis of the marginal tax rate. The line is the adjusted gross income of the taxpayers.
Adjusted gross income (AGI):
The adjusted gross income of the taxpayers determines the whether the person is eligible for tax deduction are not. Some deductions are added back in the AGI.
- Traditional IRA contributions.
- Student loan interest.
- Qualified tuition and fees.
- Moving expenses.
- Mortgage interest.
- Charitable donations.
- Medical expenses.
- Sales and local tax.
Some tax credits are given to the taxpayers for makings something beneficial to the society. With this tax credit, the tax amount is directly reduced from the amount of tax owed. The tax credits are divided into four categories:
- Earned income tax credits.
- Foreign tax credits.
- Child tax credits.
- Child and dependent care.
- Adoption credit.
Education and retirement:
- Saver’s credits.
- American opportunity credit.
- Lifetime learning credit.
- Residential energy credit.
- Non-business energy property credit.
- Plug-in-electric motor vehicle credit.
The components included in the Income-tax calculator are:
- File status: The taxpayer status like single, head of the house.
- Number of young/other dependents: The number of young and other dependents in the house on the taxpayer.
- Tax year: The year the tax is paying for 2017 or 2018.
- Compensation: The income that the taxpayer gets in the form of compensation, wages, tips etc.
- Federal/state/local tax withheld: The amount withheld by the federal/state/local.
- Has business or employment income: yes or no.
- Interest income: The income that the taxpayer get in form of interest.
- Ordinary dividends: The shares of the company held by the taxpayer.
- Qualified dividends: The tax applied to the capital gain.
- Passive income: The cash received on the regular basis like rents, profits on assets.
- Short-term capital gain: The amount gained on the short-term sold assets.
- Long-term capital gain: The amount gained on the long-term sold assets.
- Other incomes: The other incomes of the taxpayer.
- State & local tax rate: The payable tax rate of state and local.
Deductions and credits:
- IRA contribution: The contribution made by the taxpayer to the IRA plan.
- Real estate tax: The tax paid on the real estate.
- Mortgage interest: The interest paid to the mortgage.
- Charitable donations: The donations made by the taxpayer for charity.
- Student Loan interest: The interest paid to the student loan.
- Child & dependent care expense: The expenses for the child and dependent care.
- College education expense: The expenses for the college education.
- Other deductions: car loan interest, other expenses.
Using this income tax calculator the taxpayer can estimate the taxable amount on the income earned and deductions made and credits include.