Individual Income Tax

As the exhausted saying goes, taxes are one of the only certainties in life. Next is an intro to a person’s income tax including how taxable income is determined and the legal requirement of most citizens to pay income taxes to both the federal and state government.

Individual Income Tax

IRS Representation ServicesThe federal income tax is the greatest source of funds used to finance federal government expenses. The individual income tax serves a social function by allocating resources, subsidizing some persons or activities, encouraging certain kinds of economic and social behavior, reposition wealth, thought-provoking economic improvement, and clear-cut social obstacles such as pollution and urban collapse. Although the federal income tax covers most revenue productive individuals including all U.S. taxpayers and residents, corporations, trusts, and estates, this part centers on individual income taxation. The tax is a continuous tax — with the percent of tax growing as the net taxable income of a taxpayer rise.


Gross Income

Individuals are recommended to file individual returns if the gross income goes beyond the threshold. The threshold varies established on the maturity of the individual, marital situation, and residence status. Gross income is characterized as gross income from any origin derived. Most earnings are taxable except peculiar exclusions from gross income by the Tax Code  including miscellaneous payments for services of any kind, like any compensation, interest, dividends, gains on the sale of assets, rental income net, business income net, income from partnership, estates or a trust, forgiveness of indebtedness, gambling winnings, court awards or damages, and alimony.

Adjusted Gross Income

Once gross and/or total income is determined, certain modifications are applied to pinpoint gross income. Common modifications include qualified retirement account contributions, medical saving account contributions, student loan interest, moving expenses, self-employment tax, early withdrawal penalties, and alimony paid. Readjustment amounts are subtracted from total income to determine the gross income.

Deductions and Exemptions

Adjusted gross income is reduced further by one of the two, the standard deduction or itemized deductions and by personal exemption amounts. Standard deduction amount varies are relevant on the person’s filing status.

The most common itemized deductions are state and local income taxes, real property taxes, personal property taxes, home mortgage interest, investment interest, and charitable contributions. Itemized deductions are reduced from adjusted gross income to determine the net income subject to tax. Particular itemized deductions such as medical expenses, employee business expenses, casualty losses, and miscellaneous deductions are deductible only to the extent that they exceed a certain percentage of adjusted gross income.

Taxpayers can claim a personal exemption amount for the taxpayer plus a like amount for a companion and each dependent child if applicable. Itemized deductions and personal exemption amounts are terminated for higher income taxpayers.


Determining Taxable Income

The personal exemption amount plus itemized deductions are netted against adjusted gross income to determine the taxable income amount. Tax rate schedules or tax tables are applied to the taxable income amount to measure the amount of tax due. Once the tax is figured out, certain credits may apply that will lower the amount of tax due dollar for dollar. Typical credits include earned income credits, credit for the elderly, childcare credits, dependent care credits, education credits, adoption credits, and foreign tax credits.


Additional Taxes

There are further taxes that may spread to your individual income tax bill, such as tax on early distributions from retirement plans, self-employment taxes, alternative minimum tax and the household employment taxes. The most common of these is the alternative minimum tax. The alternative minimum tax applies when a taxpayer’s alternative tax exceeds the regular tax. Taxpayers are required to recompute their tax based on an alternative system which requires the taxpayer to add back itemized deductions and favorable tax preference items to make sure the taxpayer is paying a minimal amount of tax. The alternative minimum tax is like a flat tax to the extent it is a tax on total income with limited adjustments.


Capital Gains

Special rules apply to capital gain. Long standing capital gains depend on the taxpayer’s tax bracket. In order to qualify, the asset sold must be a capital asset held for more than a year. A capital asset is to include everything owned for personal or investment purposes, including such items as stocks and bonds, a house, household goods, a car, and other personal property. If a taxpayer has a loss on the sale of a capital asset, the taxpayer can net the loss against any capital gains.


When to File Income Tax Returns

Individual income tax returns are due on April 15 in the year subsequent to the tax year. Although taxpayers can file for an extension to file their return until as late as October 15, the taxes are due by April 15. The Internal Revenue Service can impose penalties and interest for failure to pay the taxes due by April 15 or failure to file by the due date (April 15 or the extended date.)


State Income Tax

Most states also collect individual income tax. Taxpayers are likely subject to state income tax in their state of residence and in any state where a taxpayer works or owns real property. Many states determine a citizen’s taxable income in a manner that is like that used by the federal government.