Personal income tax is an annual tax charged by federal, state, and local governments on the total income earned by individuals or households within a given year. It is usually based on their adjusted gross income (AGI), which includes wages, salary, bonuses, interest, and other forms of compensation from various sources.
The amount of personal income tax that must be paid depends on the taxpayer's filing status and the amount of taxable income they have reported for that year.
What Deductions are Made on Personal Income Tax?
Deductions are made from personal taxes to lower a person's taxable income. These deductions can come in various forms, such as charitable donations or medical expenses that are deductible under certain circumstances set by law.
Other standard deductions include mortgage interest payments and school tuition fees for those with children attending college or university-level study programs.
In addition to these standard deductions, special provisions may be available depending upon individual circumstances, including mortgage insurance premiums paid during one's employment. Furthermore, you can get deductions for pre-tax contributions towards retirement savings plans like 401k accounts.
Other deductions include child care costs, education credits, deductions related to higher learning studies undertaken, self-employment health insurance premiums, and student loan interest payments made throughout any period leading up to graduation.
Which Personal Income Tax Forms Should Employers Avail to Employees?
Employers are typically expected to provide employees with W-2 forms before the end of January each year. This form reports wage and salary information and taxes that have been withheld from an employee's paycheck throughout a given tax year.
In addition, employers may also need to provide employees with Form 1099 if they had non-wage income, such as dividends or capital gains from investments during the same period.
If an employee has more complex financial arrangements, such as self-employment earnings or rental property income, separate tax documents will also be needed.
How is Personal Income Tax Calculated?
Personal income taxes are calculated based on a person's total taxable income after deductions have been considered.
For instance, if your annual salary was $60,000 and you claimed $12,000 in deductions allowed under U.S. law, such as charitable donations, your taxable income would be reduced to $48,000.
This amount could be further reduced depending upon other special provisions, like whether one qualifies for additional credits/deductions related to personal or educational studies.
The remaining balance is known as 'taxable gross' when all applicable credits/deductions and other adjustments are made. This will determine how much federal tax must be paid at predetermined rates laid down by the Internal Revenue Service (IRS), state government bodies, and local authorities.
Who is Exempt From Filing Personal Income Tax?
Certain individuals may qualify for exemptions when it comes time to file their personal income taxes each year; these include people who earn below certain amounts within a given calendar year.
For instance, married couples filing jointly and earning less than $24K annually or those receiving disability benefits & supplementary social security payments are exempt from filing personal income tax returns with the IRS.
Other common exemptions can include members of religious sects who do not pay standard tax rates due to their faiths or military personnel deployed overseas at the time of filing.
What is the History of Personal Income Tax?
The history of personal income tax dates back to the early 1800s when the first national income tax was introduced in the United States. This flat rate of 3% applied to all individuals earning more than $800 per year, and it remained unchanged until 1862, when Congress passed an act authorizing a higher income tax rate.
In 1913, with the ratification of the 16th Amendment, Congress had full authority to impose taxes based on individual incomes, which it did later that year with the passage of what is now known as the Federal Insurance Contribution Act (FICA).
Since then, numerous changes have been made at federal and state levels regarding taxation brackets/rates applicable & other vital details.
Personal Income Tax Bracket
Personal income tax is calculated according to a progressive-rate system, meaning taxpayers with higher earnings pay proportionally more than those who earn less.
Each taxpayer's taxable gross will determine their marginal or effective rate(s) respectively. These are listed in IRS documents; the most recent of which was published bythe Internal Revenue Service concerning updated requirements for the calendar year 2022-2023.
What is the Deadline for Filing Personal Income Tax?
However, if one files electronically, they may obtain an automatic extension depending upon how far out the desired date needed is being requested.
Should You Hire a Tax Preparer or Use Tax Software to File Your Returns?
When it comes to filing personal income tax returns, some people prefer to use the software, while others may seek the help of a professional tax preparer.
Using software programs can be less expensive and time-consuming than having a professional do the job. However, they may not always be as accurate or up-to-date with current laws & regulations applicable, given drastic changes made over time within the sector.
On the other hand, hiring an expert knowledgeable in all aspects of taxation will provide peace of mind knowing that your returns have been assessed and filed appropriately based upon recent modifications detailed by government entities subservient to it.
Additionally, individual filers must ensure their data remains secure when uploading any related information, preventing potential identity theft or financial fraud.