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Income tax can be defined as the portion of your income which you pay the government. The exact sum paid depends upon 1. Your income level 2. Your liabilities. In the US, the system of taxation is progressive. This means that people with higher incomes pay higher tax. A lot of people have an oversimplified idea about the progressive tax system. They think that if a "poor " person pays 10% of his income in taxes, a "rich" person pays 20% or any other higher figure. However, the truth is somewhat more complicated. First of all, taxable income must be calculated. All income that is earned as salary, wage, tips, interest, from capital gains, business profit or dividends from stocks and shares is considered taxable after deducting the standard deduction. Secondly, we come to liabilities. Not all people with the same income pay the same taxes. Several criteria have been determined according to which people may get tax deductions over and above the standard deduction for which everyone is eligible. 1. Age. People above 65 get a deduction on their taxable income. 2. Whether blind or not. Blind people receive a deduction on their income which is usually equal to that received by people over 65. Blind people over 65 receive a double deduction. 3. Marital status. Married people pay tax at lower rates than single people, especially if they are widowed or file jointly. See below for details. 4. Whether head of household or not. Again, see below for details. 5. Number of children, investment in insurance policies and other criteria determined and often changed by the government on an annual basis. Up to a certain amount, money spent for these purposes is not assessed to tax. Tax deductions are made on the initially determined taxable income. For example, if someone's taxable income is $100,000 and s/he gets a total of $2000 in deductions, his/her final taxable income, on the basis of which tax is calculated, becomes $98,000. The amount of tax payable is calculated according to income bracket. As of 2009, the US income tax system allows for six income brackets, with tax rates ranging from 10% to 35%. With the progressive tax system, calculation is as follows - 1. For a person whose taxable income after standard deduction falls within bracket 1. The tax bracket is determined according to marital status and whether someone is the head of his/her household or not. For single taxpayers in 2009, the taxable income under bracket 1 was $0-$8350 and for heads of house, it was $0-$11950. 2. So for a single person earning under $8350 per annum or a head of house earning under $11950 per annum, the tax payable was 10% of total income. 3. For a person whose income falls outside bracket 1. Let us take the case of a single person whose taxable income after standard deduction is $43950, which falls in bracket 3. Here, tax is calculated as follows - • For income earned in bracket 1, i.e. from $0 to 8350, tax = 10% of $8350 = $835 • For income earned in bracket 2, i.e. from $8351 to $33950, tax = 15% of $(33950 - 8351) = 15% of $25600 = $3840 • For income earned in bracket 3, i.e. from $33950 to $43950, tax = 20% of $(43950 - $33950) = 20% of $10000 = $2000 Therefore, this person's tax liability = $(2000+3840+835) = $6675. With these basic rules and keeping the income deductions in mind, you can file your own tax returns with ease, every year.
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