Income tax is a tax levied by the government on the income generated by individuals, businesses, and other entities within its jurisdiction.
This is the total income earned by an individual or entity, from all sources, subject to taxation. It includes salaries, wages, bonuses, rental income, investment income, capital gains, and other sources of income.
Income tax rates can vary depending on the country and the individual's or entity's income level. Tax rates may be progressive, meaning they increase as income rises, or flat, where the same rate applies regardless of income level.
Many tax systems have different tax brackets, with each bracket representing a range of income subject to a specific tax rate. As income increases, it may move into higher tax brackets, resulting in a higher tax liability.
Taxpayers can often reduce their taxable income by claiming deductions and tax credits. Deductions are expenses that can be subtracted from taxable income, such as mortgage interest, charitable contributions, and certain business expenses. Tax credits, on the other hand, directly reduce the amount of tax owed, often for specific purposes like education expenses or energy-efficient home improvements.
Taxpayers are typically required to file annual tax returns, reporting their income, deductions, and credits to calculate their final tax liability. Taxes can be paid throughout the year through employer withholding, estimated tax payments, or lump-sum payments at tax time.
Tax treaties between countries may affect how income is taxed for individuals and businesses operating across borders. These treaties aim to prevent double taxation and provide guidelines for determining tax liabilities.
Tax authorities enforce tax laws through audits, investigations, and penalties for non-compliance or tax evasion. Compliance with tax laws is essential for individuals and businesses to avoid legal consequences.
Taxpayers often engage in tax planning to minimize their tax liabilities through strategic financial decisions, such as timing income and deductions, structuring investments efficiently, and taking advantage of available tax breaks.