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What are Income Taxes?



Taxes are complex
Taxes are complex


Income taxes are taxes levied on the income of individuals and businesses by the government. In the United States, the federal government, state governments, and some local governments all have the authority to collect income taxes.


Why do we have income taxes?


Income taxes are a way for governments to collect revenue in order to fund public services and programs. The money collected from income taxes is used to pay for things like national defense, infrastructure, education, and social welfare programs. Income taxes are typically based on a person's or organization's income or profits, and the amount of tax paid is usually determined by a progressive tax rate, meaning that those who earn more pay a higher percentage of their income in taxes.


The idea behind this is that those who can afford to pay more should contribute more to the common good. Income taxes are also used to redistribute wealth, as it is used to provide government assistance to those who are less fortunate. Income taxes are considered as a way to generate revenue for the government to meet its expenses.


When was the first income tax implemented?


The first income tax was implemented in the United States in 1861 during the Civil War. It was a temporary measure, put in place to fund the war effort. The tax was a flat rate of 3% on all incomes over $800, which was a significant amount of money at the time. The tax was later repealed in 1872. In the United States, the first permanent income tax was created in 1894 by the Wilson-Gorman Tariff Act, which imposed a 2% tax on incomes over $4,000. This law was later declared unconstitutional by the Supreme Court in 1895. The 16th Amendment to the United States Constitution, ratified in 1913, authorized Congress to levy an income tax without apportioning it among the states or basing it on the United States Census.


It's worth noting that other countries such as Great Britain, implemented income tax earlier, first time in 1799 (during the Napoleonic War) but it was repealed in 1802.


How do income taxes work?


Income taxes are based on the principle of progressive taxation, which means that the more income you earn, the higher your tax rate will be.


In the United States, the Internal Revenue Service (IRS) is responsible for collecting income taxes. The IRS uses a tax bracket system to determine the tax rate that applies to your income.


For example, if you are a single filer and earn $50,000 per year, your tax rate would be 22%. This means that you would owe $11,000 in income taxes for the year.


Who pays income taxes?


Income taxes are paid by individuals and businesses that earn income. In the United States, all individuals who earn income are required to pay income taxes, regardless of how the income is earned (e.g., wages, salary, self-employment, investments).


Businesses also pay income taxes on their profits. The type of business entity (e.g., sole proprietorship, partnership, corporation) determines how the business is taxed.


What are the types of income taxes?


There are two main types of income taxes: federal income taxes and state income taxes.

Federal income taxes are collected by the IRS and are used to fund the federal government's programs and services. State income taxes are collected by the state government and are used to fund state programs and services. Some states do not have a state income tax.

In addition to federal and state income taxes, some local governments may also collect income taxes.


What are the income tax rates?


Income tax rates vary depending on the amount of income you earn and your filing status (e.g., single, married filing jointly, head of household). In the United States, the income tax rates for the 2023 tax year are:


Single Filers:

  • 10% for taxable income up to $11,000 for single filers

  • 12% for taxable income between $11,000 and $44,725 for single filers

  • 22% for taxable income between $44,725 and $95,375 for single filers

  • 24% for taxable income between $95,375 and $182,100 for single filers

  • 32% for taxable income between $182,100 and $231,250 for single filers

  • 35% for taxable income between $231,250 and $578,125 for single filers

  • 37% for taxable income over $578,125 for single filers

Married Filing Jointly:

  • 10% for taxable income up to $22,000

  • 12% for taxable income between $22,000 and $89,450

  • 22% for taxable income between $89,450 and $190,750

  • 24% for taxable income between $190,750 and $364,200

  • 32% for taxable income between $364,200 and $462,500

  • 35% for taxable income between $462,500 and $693,750

  • 37% for taxable income over $693,750

Head of Household:

  • 10% for taxable income up to $15,700

  • 12% for taxable income between $15,700 and $59,850

  • 22% for taxable income between $59,850 and $95,350

  • 24% for taxable income between $95,350 and $182,100

  • 32% for taxable income between $182,100 and $231,250

  • 35% for taxable income between $231,250 and $578,100

  • 37% for taxable income over $578,100


What is a standard tax deduction?


A standard tax deduction is a fixed dollar amount that taxpayers can subtract from their taxable income when they file their taxes. The purpose of the standard tax deduction is to reduce the amount of income that is subject to taxes, and thus lower the amount of taxes that taxpayers owe. The standard tax deduction is usually adjusted for inflation each year. The amount of the standard tax deduction varies depending on the taxpayer's filing status, for example, for 2020, for the tax year, the standard deduction for single filers is $12,400 and for married couples filing jointly is $24,800.


The standard tax deduction is one of the two main ways to reduce your taxable income, the other one being itemized deductions. Taxpayers have the option to take the standard deduction or to itemize their deductions, whichever results in a lower tax liability.


It's worth noting that with the Tax Cuts and Jobs Act of 2017, the standard tax deductions have increased and some of the itemized deductions were limited or suspended.


How much is the standard deduction in 2023:


Single:

$13,850


Married filing Jointly:

$20,800


Head of Household:

$27,700


Summary


I hope this article helps to explain what income taxes are and how they work. If you have any additional questions, feel free to ask.

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