Income Tax

Income Tax

BA 250

Income Tax

Income tax is tax imposed on financial income generated by all entities within the jurisdiction of a government. According to the law, individuals and businesses must file an income tax return every year to determine whether they owe any taxes and their eligibility for a tax refund. Income tax is one of the sources of revenue for a government. The United States Internal Revenue Services (IRS) through the United States Tax Center provides information about taxable income and tax rates for various income levels based on the filing status of an individual, which may be single, married filing jointly or qualifying widow or widower, married filing separately and head of household. Upon conducting online research for federal income tax for the current year, with my filing status as single, and my level of income as $10,000, I fit in the tax bracket of $927.50 plus 15% of the amount over $9,275.

My gross household income is the next level after the lowest in the tax bracket. The lowest level of income in my filing status is at $0-$9,275 with a tax rate of 10%. My gross household income is at $10,000 and therefore falls in the next level of income between $9,276 and $37,650. The United States IRS provides for taxpayers to claim personal exemption and standard deductions. It provides a fixed amount for each of these two categories. For standard deductions, the taxpayer can claim the fixed amount set by the IRS for the tax year, or claim itemized deductions according to the guidelines and requirements by IRS.

The personal exemption amount phases out for individuals with higher incomes, and the IRS provides thresholds for various filing status. The standard deductions are in two categories including standard deductions and itemized deductions. The taxpayer can only claim one type of deduction on their tax return. The standard deduction is subtracted from the taxpayer’s adjusted gross income, thereby reducing their taxable income. The standard deduction amounts are in categories based on the filing status of the taxpayer. The standard deduction is a fixed amount a taxpayer can claim if they do not have enough itemized deductions to claim. Itemized deductions can be in a list and may include specific medical and dental expenses, individual retirement accounts, taxes paid, interest paid including home mortgage, investment interest, and mortgage insurance premiums, gifts to charity, casualty and theft losses, job expenses and some miscellaneous deductions.

The list of possible deductions for my household includes charitable contributions, for which I pay $100 monthly, retirement savings for which I pay $500 monthly and out of pocket medical expenses for which I pay $500 monthly. This comes to a total of $1100 per month. I am able to reduce my taxable income enough to place me in the next lowest tax bracket by filing for itemized deductions under the standard deductions provided for by the IRS. Deduction of this amount of $1,100 from my gross income results in a taxable income of $8900. This income level places me in the next lowest tax bracket which is the lowest level of taxable income in my filing status of ‘single’ taxpayers. This income tax bracket is for taxable income between $0 and $9,275, with a tax rate of 10%. This makes me pay less tax for the income I currently earn.

If I were unable to file for itemized deductions, I would claim the standard deductions amount, which is a fixed amount set by the IRS, and this would be a total of $6300 for the tax year 2016 according to my filing status ‘single’. This would cut down on the amount I pay as income tax. Another way to reduce the amount of income tax I pay is by changing my filing status from ‘single’ to ‘head of household’. This filing status has less income tax for taxable income as compared to other categories of filing status.

References

Internal Revenue Services. (2016). Schedule A(Form 1040). Retrieved from www.irs.gov

United States Tax Center. (2016). 2016 Federal Tax Rates, Personal Exemptions, and Standard Deductions: IRS Tax Brackets & Deduction Amounts for Tax Year 2016.