Income tax is a type of tax that you pay on your income, which is the money that you earn or receive from various sources, such as employment, self-employment, interest, dividends, pensions, rentals, etc. Income tax is one of the main sources of revenue for the government, and it is used to fund public services and programs, such as education, health care, defense, infrastructure, etc. Income tax is also a way of redistributing wealth and reducing inequality in society, as people with higher incomes pay higher tax rates than people with lower incomes.
However, income tax can also be complicated and confusing, especially if you have a complex financial situation or are not familiar with the tax rules and regulations. Therefore, it is important to understand the basics of income tax and how to file your taxes correctly and on time. In this article, we will explain some of the key concepts and steps involved in filing your taxes, and provide some tips and resources to help you with the process.
Related articles
1- Property Tax
2- Tax Return
4- Certified Financial Advisor
What is taxable income?
Taxable income is the amount of income that you have to pay tax on. Not all types of income are taxable; some are tax-free or exempt from income tax.
For example, in the United States, some of the common types of tax-free income include:
- The first $12,570 of income from self-employment – this is your ‘trading allowance’1
- The first $12,570 of income from property you rent (unless you’re using the Rent a Room Scheme)1
- Income from tax-exempt accounts, like Individual Savings Accounts (ISAs) and National Savings Certificates1
- Dividends from company shares under your dividends allowance1
- Some state benefits1
- Premium bond or National Lottery wins1
- Rent you get from a lodger in your house that’s below the rent a room limit1
To determine your taxable income, you need to add up all your sources of income and subtract any deductions or allowances that you are eligible for. Deductions or allowances are amounts that you can subtract from your income to reduce your taxable income. For example, in the United States, some of the common deductions or allowances include:
- Your personal allowance – this is the amount of income that you do not have to pay tax on. The standard personal allowance is $12,570 for 20202.
- Your standard deduction – this is a fixed amount that you can subtract from your income without having to provide any proof of expenses. The amount of the standard deduction depends on your filing status, age, and blindness. For 2020, the standard deduction amounts are:
- $12,400 for single or married filing separately
- $24,800 for married filing jointly or qualifying widow(er)
- $18,650 for head of household2
- Your itemized deduction – this is a list of specific expenses that you can subtract from your income if you have proof of payment. Some of the common itemized deductions include:
- Mortgage interest
- Property taxes
- State and local income taxes or sales taxes
- Charitable donations
- Medical expenses
- Casualty and theft losses2
You can choose either the standard deduction or the itemized deduction, whichever is higher for you.
What are tax rates and brackets?
Tax rates and brackets are the percentages and ranges of income that determine how much tax you pay on your taxable income. Tax rates and brackets vary depending on your country, your filing status, and your level of income. Generally speaking, most countries use a progressive tax system, which means that people with higher incomes pay higher tax rates than people with lower incomes.
For example, in the United States, the federal income tax rates and brackets for 2020 are:
| Filing status | Taxable income | Tax rate |
|---|---|---|
| Single | Up to $9,875 | 10% |
| Single | $9,876 to $40,125 | 12% |
| Single | $40,126 to $85,525 | 22% |
| Single | $85,526 to $163,300 | 24% |
| Single | $163,301 to $207,350 | 32% |
| Single | $207,351 to $518,400 | 35% |
| Single | Over $518,400 | 37% |
| Married filing jointly | Up to $19,750 | 10% |
| Married filing jointly | $19,751 to $80,250 | 12% |
| Married filing jointly | $80,251 to $171,050 | 22% |
| Married filing jointly | $171,051 to $326,600 | 24% |
| Married filing jointly | $326,601 to $414,700 | 32% |
| Married filing jointly | $414,701 to $622,050 | 35% |
| Married filing jointly | Over $622,050 | 37% |
| Married filing separately | Up to $9,875 | 10% |
| Married filing separately | $9,876 to $40,125 | 12% |
| Married filing separately | $40,126 to $85,525 | 22% |
| Married filing separately | $85,526 to $163,300 | 24% |
| Married filing separately | $163,301 to $207,350 | 32% |
| Married filing separately | $207,351 to $311,025 | 35% |
| Married filing separately | Over $311,025 | 37% |
| Head of household | Up to $14,100 | 10% |
| Head of household | $14,101 to $53,700 | 12% |
| Head of household | $53,701 to $85,500 | 22% |
| Head of household | $85,501 to $163,300 | 24% |
| Head of household | $163,301 to $207,350 | 32% |
| Head of household | $207,351 to $518,400 | 35% |
| Head of household | Over $518,400 | 37% |
| Qualifying widow(er) with dependent child | Up to $19,750 | 10% |
| Qualifying widow(er) with dependent child | $19,751 to $80,250 | 12% |
| Qualifying widow(er) with dependent child | $80,251 to $171,050 | 22% |
| Qualifying widow(er) with dependent child | $171,051 to $326,600 | 24% |
| Qualifying widow(er) with dependent child | $326,601 to $414,700 | 32% |
| Qualifying widow(er) with dependent child | $414,701 to $622,050 | 35% |
| Qualifying widow(er) with dependent child | Over $622,050 |
To calculate your tax liability using the tax rates and brackets, you need to apply the corresponding tax rate to each portion of your taxable income that falls within each bracket.
For example, if you are single and have a taxable income of $50,000 in 2020, you would pay:
- 10% on the first $9,875
- 12% on the next $30,250 ($40,125 – $9,875)
- 22% on the remaining $9,875 ($50,000 – $40,125)
Your total tax liability would be:
- ($9,875 x 0.1) + ($30,250 x 0.12) + ($9.875 x 0.22)
- = $987.5 + $3.630 + $2.172.5
- = $6.790
What are tax credits and refunds?
Tax credits and refunds are amounts that you can subtract from your tax liability or receive as a payment from the government. Tax credits and refunds can reduce your tax liability or increase your refund or decrease your balance due. However, not all tax credits and refunds are available to everyone; some of them have specific eligibility criteria, limitations, or phase-outs that you need to meet or comply with.
Tax credits can be either refundable or nonrefundable. Refundable credits are those that can reduce your tax liability below zero and result in a refund. Nonrefundable credits are those that can only reduce your tax liability to zero but not below it. Some of the common tax credits include:
- Earned income credit: This is a refundable credit for low- to moderate-income workers and families. The amount of the credit depends on your income level, filing status, and number of qualifying children3.
- Child tax credit: This is a partially refundable credit for parents or guardians of children under the age of 17. The amount of the credit is up to $2, 000 per qualifying child, plus an additional $500 for other dependents3.
- Child and dependent care credit: This is a nonrefundable credit for expenses paid for the care of a qualifying child or dependent while you work or look for work. The amount of the credit is a percentage of up to $3, 000 of expenses for one qualifying person or up to $6, 000 for two or more qualifying persons3.
- American opportunity credit: This is a partially refundable credit for education expenses paid for the first four years of higher education. The amount of the credit is up to $2, 500 per eligible student3.
How do I file my taxes online?
To file your taxes online, you have several options depending on your income level, eligibility criteria, and preferences. You can use one of the following methods:
- IRS Free File: This is a free service provided by the IRS in partnership with some private tax software companies. It allows eligible taxpayers with an adjusted gross income of $72,000 or less in 2020 to prepare and file their federal tax returns for free using one of the participating software programs1.
- IRS Free File Fillable Forms: This is a free service provided by the IRS for taxpayers who are comfortable with filling out their own tax forms without any guidance or assistance. It allows anyone to prepare and file their federal tax returns for free using online versions of paper forms2.
- IRS e-file Providers: These are authorized third-party companies that offer electronic filing services for a fee. They can help taxpayers prepare and file their federal and state tax returns using their own software programs or websites.
- Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs: These are free services provided by IRS-certified volunteers who can help eligible taxpayers with low to moderate income, persons with disabilities, limited English speakers, and seniors prepare and file their basic federal and state tax returns electronically.
How long does it take to get a tax refund?
The answer to how long it takes to get a tax refund depends on several factors, such as the country, the type of taxpayer, the method of filing, and the accuracy of the tax return. According to the web search results, some of the common time frames for getting a tax refund are:
- In the United States, more than 90 percent of tax refunds are issued by the IRS in less than 21 days, according to the IRS1. However, the exact timing of receiving your refund depends on a range of factors, and in some cases, the process may take longer1.
- In the United Kingdom, it usually takes between five days to eight weeks to get a tax refund from HMRC, although it can take up to 12 weeks23. How long a tax rebate takes depends on how you apply (either through the post, over the phone or online) and if HMRC has to conduct further security checks23.
- In Canada, it generally takes two weeks for online returns and eight weeks for paper returns to get a tax refund from CRA. However, this may vary depending on when you file your return and if there are any errors or delays in processing your return.
- In India, it typically takes 20 to 45 days for e-filed returns and 35 to 60 days for paper-filed returns to get a tax refund from ITD. However, this may vary depending on the mode of payment, the verification status, and the complexity of your return.
You can find more information and guidance on choosing the right electronic filing option for you on the IRS website3 or on other reputable websites. You can also use Bing web search to find more resources and tools to help you with filing your taxes online.
How long does it take to get a tax refund?
Related Articles
About the Author
0 Comments