Governments collect taxes, including income tax, which is calculated based on an individual’s earnings and is progressive. The US introduced income tax in 1914 to make the wealthy pay their fair share. Payroll deductions are made for taxes, Social Security, insurance, and union dues. Tax season runs from January to April, and taxpayers can deduct expenses and charitable donations to reduce their tax liability.
Almost all governments are financed, at least in part, by some form of tax on their citizens. Most of these taxes are collected at the time of a sale or service, but others are collected at the end of a 12-month period called a tax year. One of those annual taxes is the much feared income tax. This is essentially a bill by the federal and state governments for individual gain through wages and investment earnings. It is considered a progressive tax because the individual’s financial obligation increases with the level of reportable income.
However, the United States has not always had an official income tax. After years of oppression under the thumbs of robber barons and corrupt corporate executives, early 20th century congressional leaders created a national income tax law in 1914 primarily to force the wealthiest and greedy to pay their fair share. Finally, this reform would reach the middle and lower working classes. Although the tax remains progressive, many of the wealthiest businesses and individuals benefit from a number of legal exemptions.
Fortunately, income tax can only be applied to positive income, not a net loss. The basic tax structure allows people to earn a certain amount of non-taxable income. This is usually calculated by the amount of the standard deduction listed on federal and state tax forms. If an individual has not earned more than the amount of the standard deduction (usually a few thousand dollars), then he or she owes nothing.
However, the problem facing salaried employees is that the payroll department is required to deduct a fixed percentage of money from each paycheck for tax purposes. Federal and state income tax is deducted according to a specific calculation based on the employee’s marital and dependency status. Other payroll deductions are also made to cover Social Security (FICA) contributions, insurance, union dues, and any voluntary contributions. The amount collected is then reported on an official tax form called a W-2. Income without such tax deductions can be reported on another form called a 1099.
During tax season, from January to April 14, people must report all of their total income from wages and investment earnings. The standard deduction is subtracted from the total and the remainder is considered taxable income. A chart provided with official 1040 tax forms reveals the actual amount owed to the government. If the amount withheld by the payroll department is greater than this number, the government will issue a refund for the difference. If the W-2 number is lower, then the individual owes more income tax and must pay the Internal Revenue Service.
For most middle-class taxpayers, the income tax liability is about 15% of their gross income. Individuals and businesses can legally deduct many expenses related to their occupations, which can significantly reduce this amount. Charitable donations can also be used to offset income tax obligations.
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