Individual Taxes

Personal income tax is a tax imposed by a government on an individual’s income. In other words, the income tax is payable on an employee’s wages and salaries.

Most individuals do not pay the individual income tax on the full amount of income due to tax exemptions, deductions, and credits. A series of deductions is offered by the U.S. Internal Revenue Service, e.g., deductions for healthcare and education expenses, which taxpayers benefit from to reduce their taxable income.

Imagine an individual who earns $200,000 in income and is qualified for $30,000 of tax deductions. In such a case, the taxable income will be reduced to $170,000 ($200,000 – $30,000).

Regarding tax credits, they are used in the reduction of a taxpayer’s tax obligation or owed amount. For example, someone needs to pay $30,000 in income taxes, and they only qualify for $5,000 in tax credits. So, their tax obligation will be reduced to $25,000 ($30,000 – $5,000).

Personal income tax rates vary from state to state because of different laws and government systems. Although, the majority of states employ a so-called progressive income tax system, which means those who earn more are subject to a higher tax rate compared to the lower-income earners.

What Does Personal Income Tax Apply To?

Personal income tax applies to the following entities:

• Self-employed individuals
• Full-time employees

What is a Tax Return?

A tax return is a special document filed with the tax authority that contains information needed to calculate taxes for an entity. The document specifies reported income, expenses, and other financial information. It consists of three sections:

• Income (mentions all sources of income of an entity)
• Deductions
• Tax credits

After accounting for tax benefits (deductions and tax credits, etc.), taxpayers arrive at their tax return, which is the amount owed to the government in taxes.

Typically, tax returns must be filed annually.