What is Income Tax?
Income tax is a mandatory government levy on the money you earn from employment, business, investments, and other sources. Different tax brackets apply based on income level, and various deductions and credits can reduce your tax liability.
Income tax is the government's charge on your earnings, calculated using tax brackets based on income level and reduced by deductions and credits you qualify for. You must file and pay annually.
Step-by-step worked examples
Gross income $60,000. Standard deduction $13,850. Tax bracket 12% on taxable. Estimate tax owed.
Gross: $60,000 Less standard deduction: $60,000 − $13,850 = $46,150 (taxable) Tax (12% bracket): $46,150 × 0.12 = $5,538
Self-employed income $80,000. SE tax ~15.3% of 92.35% of income. Income tax 22% bracket. Total tax?
SE tax: 80,000 × 0.9235 × 0.153 = $11,303 Taxable after SE/deductions: ~$80,000 − $13,850 = $66,150 Income tax: $66,150 × 0.22 = $14,553 Total: $11,303 + $14,553 = $25,856
Investment income (dividends, capital gains) $5,000. Long-term capital gains 15% rate. Tax?
Long-term capital gains taxed at 15% (preferable rate) Tax: $5,000 × 0.15 = $750
Flashcards
Quick quiz
Q1.Progressive tax system means…
Q2.$80,000 income, $13,850 standard deduction. 22% bracket. Tax owed (approx)?
Q3.Tax credit vs tax deduction?
Q4.Why do employers withhold taxes?
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Common mistakes
Assuming all income is taxed at the same rate. — Correct: Tax brackets are progressive — different rates apply to different income ranges.
Ignoring the difference between tax deductions and tax credits. — Correct: Credits reduce tax dollar-for-dollar; deductions reduce taxable income (worth less).
Not filing taxes because you think you don't owe money. — Correct: File even if you overpaid — you get a refund.
Forgetting to report 1099 or investment income. — Correct: All income sources must be reported; IRS tracks them via issuer reports.
FAQ
What is income tax?
Income tax is the government's annual levy on your earnings, calculated using tax brackets and reduced by deductions and credits.
What is taxable income?
Gross income minus deductions and exemptions — the amount on which your tax rate is applied.
How are tax brackets used?
Each bracket applies only to income within that range. You pay different rates on different slices of income (not entire income at highest rate).
What's the difference between tax credits and deductions?
Deductions reduce taxable income; credits reduce the tax owed directly (worth more).