Understanding Income Tax

They say that the only constants in life are death and taxes. The income tax is an often unwelcome facet of life that seems steeped in inevitability with the potential of creating great amounts of confusion each year. From individuals to corporations and nonprofit organizations, everyone has to file a tax return each year, even if some of these organizations are exempt from paying taxes.

The IRS will not only tax you on the wages you earn throughout the year, you’ll also be taxed on any investment profits, dividends, interest or pension income you happen to receive. On the other hand, the IRS will not tax you for gifts you’ve received, including inheritances and scholarships. It may all seem daunting at first, but getting a firm grip on how the IRS handles your taxes can make a world of difference as you prepare to file.

The U.S. income tax system is based on a progressive scale. In other words, you’ll owe more in taxes as your income grows. The amount of taxes you pay is determined by the marginal tax rate bracket your income amount falls under. Individuals and families with a relatively low income benefit from having a lower tax rates while those who make more money pay more in taxes. In many cases, high-income individuals are often subject to a marginal tax rate of 35 percent and beyond. Federal income taxes are often joined by state income taxes. Some states require residents to file a state income tax form every year while a select few do not tax income.

The income tax is a fact of life that is unavoidable – everyone has to pay taxes throughout the course of their lives. Along with state and local taxes, federal taxes are paid through deductions from your paycheck. In fact, you can see how much you’re paying in federal taxes just by looking at your pay stub. Contract workers whose taxes are not automatically deducted from their pay are often required to pay the government the taxes they owe for the year. Entrepreneurs and small-business owners often pay what they owe to the government on a quarterly basis.

If you haven’t paid enough according to your income and your marginal tax rate bracket, you’re required to pay the balance due. This balance is due in full by April 15 of the following year; otherwise the government will charge interest and penalties on the amount due. Taxpayers who need extra time to prepare their tax return can ask for an extension, while those who have difficulty paying the amount owed can arrange monthly payments through an installment agreement. The IRS is usually willing to work with taxpayers who want to settle their balances as quickly as possible despite ongoing financial difficulties.

There are tax benefits available that help lessen the overall tax burden while rewarding individuals for making sound financial decisions. For instance, taxpayers with young children or family members classified as dependents can benefit from the earned income tax credit. Those with retirement accounts such as a 401(k) are able to lower their taxes by qualifying for a lower tax rate. There are many other tax benefits available depending on your situation.

While wait times for receiving tax refunds have gone down considerably thanks to the advent of online tax filing and the IRS’s own efforts, there remains a delay between filing your taxes and receiving your refund. If you have questions about your tax situation, you can turn to the helpful advice of an experienced tax professional. These professionals are well versed in the many tax laws and regulations enacted and revised by the IRS each year. A tax professional can guide you through your tax return if you find it difficult to understand the tax laws on your own. The most important thing to keep in mind is to always have your financial documents stored somewhere safe to avoid having to look for them whenever you need them.

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