Income Tax Definition

Taxes are something you can’t avoid, so let’s talk about them. In this article, we discuss the income tax definition and cover the following topics: 

• Definition of Income Tax
• Income Tax Benefits
• Income Tax Examples

Definition of Income Tax

Income tax is a tax you pay to the government based on the amount of income you make. Both individuals and entities must file an annual income tax return and pay the amount owed. Income taxes are imposed by federal, state, and local governments. In the U.S., our federal government (through the Internal Revenue Service) uses a progressive income tax system where the more money you make the higher your tax rate is, and the more income tax you pay. 

Although most income is subject to income tax, some forms of income are exempt. You can also use tax deductions to decrease your taxable income and tax credits to reduce your tax liability. 

Income Tax Benefits

It can be tough to see your hard-earned money go toward taxes, but they exist to provide for everyone. We pay income taxes so that our government can fund public services, pay government debts, and offer goods and services to taxpayers. Taxes, in general, are a key source of revenue for the government to function properly. 

Income Tax Examples

There are several different types of income taxes: there are personal taxes, business taxes, as well as federal, state, and local taxes. Tax rates vary based on the type of taxpayer (individual versus entity) and the type and amount of income. 

Personal Income Tax

Personal income tax (also known as individual income tax) is a tax on a person’s income. Wages, salaries, dividends, interest, and other forms of income an individual earns are subject to income tax. The federal government and a majority of states impose an individual income tax. 

Business Income Tax

Businesses also pay income taxes. All businesses, except partnerships, are required to file an annual federal income tax return. Partnerships only file an information return. How your business is structured determines how it reports and pays income taxes. For example, if you have a limited liability company (LLC), the LLC itself doesn’t pay income taxes. Rather, each member pays taxes on their portion of the business’s income and reports the income on their individual return. This is known as pass-through taxation because the taxes pass through the company down to the individual owners. 

State and Local Income Tax 

State governments and local municipalities have the authority to impose income taxes as well. Tax calculation methods vary between states and cities, so it’s important to be familiar with your jurisdiction’s tax rates. 

Summary

The income tax meaning is a tax collected by the government based on your income. Income taxes are a way for the government to make money off of your income and profits so that it can fund its operations.