Almost all governments across the globe are funded- in some form
- by the taxation of its citizens. Certain of the taxes are
collected at the time of sales or service whereas certain others
in a 12 month period or at the end of what they call a fiscal
year. Taxes on earnings or income tax is such a yearly beast.
Taxes on earnings are essentially a bill from the federal and
state governments, declaring the rules of taxation on one's
personal earnings through salaries and investment profits. It
has been designed as a progressive tax in which the financial
obligations of an individual increase with the rise in his/her
reportable income.
In United States, taxes on earnings came to effect officially or
in a full swing after the passing of national income tax law in
1914. At that time, the law was mainly aimed at the rich and the
greediest among the population who owned a lot of wealth in
contradiction to the majority of the people. Eventually in
another few years, the tax on earnings would trickle down to the
middle and lower working classes. In reality, even though the
tax on earnings is progressive, big corporate and wealthiest
individuals enjoy a lot of legal exceptions as of now at least.
Taxes on earnings are levied only on a positive income and not
on net loss. The taxes on earnings structure has been designed
in such a way that individuals can earn a certain non-taxable
income, the standard deduction amount being decided by the state
and federal governments and subsequently listed on the
respective tax forms. It follows that if a person is not earning
an amount that is above the specified standard deduction amount,
then he/she need not have to pay the taxes on earnings.
In the case of wage earners, the department of payroll is
obliged to cut a set percentage of the money from the pay checks
for taxation purposes. The amount to be deducted is decided on
the basis of some specific calculations based on the
individual's dependency and marital status. The amount deducted
in this regard is shown in an official tax form called a W-2.
The untaxed income will be reported on a form called a 1099.
The income tax season is from January to April 14 and during
this period every individual should report their total income
from wages and profits from investments to the government
without fail. The amount to be paid as tax will be in give a
chart provided with the form 1040.
If the amount deducted by the payroll department is higher than
the amount specified by the chart, then the excess amount
deducted will be refunded. If it is the other way around, the
individual must pay the IRS accordingly.
For a middle class person, the taxes on earnings can amount to
15% of their gross annual income. By sighting expenses related
to their profession, one can claim legal deductions from the tax
to be paid thus reducing the amount significantly. Also charity
donations can serve to offset taxes on earnings.
There is more than one provision by which one could save on the
taxes on earnings while still remaining within the contours as
mandated by the tax laws. A tax preparing firm or an experienced
accountant could help one in using the tax concessions to the
fullest.
About the author:
Jakob Jelling is the founder of
http://www.cashbazar.com. Visit
his website for the latest on personal finance, debt
elimination, budgeting, credit cards and real estate.
