Federal income tax is a tax imposed by the United States federal government on individuals, corporations, estates, and trusts based on their income. It is the primary source of revenue for the federal government and is collected by the Internal Revenue Service (IRS). Federal income tax is progressive, meaning that individuals and entities with higher incomes are generally subject to higher tax rates.
Here are some key points about federal income tax:
Taxable Income: Federal income tax is calculated based on taxable income, which is gross income minus allowable deductions and exemptions. Gross income includes wages, salaries, interest, dividends, rental income, business income, capital gains, and other sources of income.
Tax Brackets: The federal income tax system is divided into tax brackets, each with its own tax rate. Tax rates increase as taxable income rises. The tax brackets and rates are adjusted periodically by the government to account for inflation and changes in tax laws.
Deductions and Credits: Taxpayers can reduce their taxable income through deductions and credits. Deductions, such as the standard deduction or itemized deductions, reduce the amount of income subject to tax. Credits, such as the Earned Income Tax Credit or Child Tax Credit, directly reduce the amount of tax owed.
Filing Requirements: Individuals and entities are required to file federal income tax returns with the IRS annually. The deadline for filing individual tax returns is typically April 15th of the following year, although it may be extended in certain circumstances.
Withholding and Estimated Taxes: Many individuals have federal income tax withheld from their paychecks by their employers throughout the year. Additionally, individuals who receive income not subject to withholding, such as self-employment income, may be required to make estimated tax payments quarterly.
Tax Forms: Various tax forms are used to report income and calculate federal income tax, including Form 1040 for individual taxpayers, Form 1120 for corporations, and Form 1041 for trusts and estates. The specific forms required depend on the taxpayer's filing status and circumstances.
Tax Reform: Federal income tax laws are subject to change through legislation. Tax reform efforts can lead to changes in tax rates, deductions, credits, and other aspects of the tax code.
Overall, federal income tax plays a significant role in funding government programs and services, and understanding its implications is essential for individuals and entities subject to taxation in the United States.
