Filing your taxes can be confusing, especially since there are so many forms and applications. Whether you file with the help of a professional or on your own, calculating the exact total amount owed to the Internal Revenue Service (and vice versa) can take time.
You may not fully understand what is being deducted from your paycheck and why. And this depends on where you live and work.
Here we will introduce income tax. Learn what income tax is, how it works, how it’s calculated, and which states don’t have it.
What is income tax?
Income tax is a tax that governments impose on income earned by individuals and businesses within their jurisdiction.
Both federal and state income taxes exist. However, not all states have income taxes. In such countries, taxpayers must file an income tax return each year to determine their liability.
The purpose of income tax is to pay for public services and government obligations and provide goods to the people. For example, personal income taxes help fund Social Security, schools, and roads.
Types of Income Taxes
Personal income tax, also known as personal income tax, is levied on an individual’s wages, salaries, and other income. This particular tax is typically collected by the state. Depending on your situation, there are certain exemptions, deductions, or credits that can help you avoid paying taxes on your income.
Business tax applies to corporations, small businesses, and self-employed individuals. A company, its owners or shareholders disclose business income and then deduct operating and capital expenses. The difference is the company’s taxable business income.
Which states have no income tax?
There are eight states that have no income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire has a state income tax. No, but Residents pay 5% tax on interest income and dividends.
What percentage of my income is taxed?
The percentage of your income that is taxed depends on your specific circumstances, such as your income and tax status. Simply put, the more you earn, the more taxes you pay.
How to calculate income tax?
To calculate income tax, add up all taxable income earned in a tax year. Next, determine your adjusted gross income. Then subtract your allowable deductions from your adjusted gross income.