The Answers about Federal Income Tax

What is Federal Income Tax?

The tax which is levied by the United States Internal Revenue Service on the annual earnings of the corporations, trust, individuals and other legal entities is called Federal tax. It is applied to all the earnings that sums up the taxable income of the taxpayer, like the capital gains or the employment earnings.

It is the tax collected by the government from the entity where it is operating from and credited to the government or the country’s account.

This Federal tax is used by the government for the country’s growth and up keeping of the country. We can also say that it is the rent charged for the resources we use provided by the government.

When you pay the tax, the government, in turn, invests in building the economy of the state.

They can be used for various programs like

  • Building or repairing of infrastructure
  • Fund the pensions
  • Benefits of Government workers
  • Improve Education facilities
  • Improve Public transportation facilities
  • Improving agricultural and health facilities
  • To provide emergency relief funds.

This tax is built on a progressive tax system, where the higher income earners are taxed at a higher rate. The annual threshold is set by the government. Taxpayers who earn below an annual threshold would pay little or no tax, while workers who more have a mandatory tax rate that applies to their income. The tax rate is set up in a marginal tax bracket that defines the highest tax rate that has to be paid on income earned.

What are the types of Federal Taxes:

Income Tax:

This is the most common of federal taxation. It allows the government to procure tax from any individual or business that earns money for a particular year.

Gift Tax:

Although, it is not the common tax levied. It is basically levied when you gift an entity or an individual. But be assured that the government is not going to tax you on those small birthday gifts. This tax is only charged for large or high valued gifts.

Estate Tax:

This estate tax is charged when you transfer the money or property to your heirs at the time of death. Taxation is subjected to the value of your estate which exceeds the exemption amount for the year of your death. Though there is an overlap between the estate and gift tax, they work the same.

Employment Tax:

The revenue that is raised by the federal government through the imposition of the employment taxes provides the necessary funds for operating the social and welfare programs. You will find this tax being deducted in your salary paycheck.

Final Word:

It is vital to distinguish between the federal income tax and the general notion of income tax.

The government of the United States may levy income taxes at the state level in addition to federal income taxes. Not all of the states have implemented state-level income taxes in their regions. The states of Washington, Texas, Alaska, Florida, South Dakota, Nevada, and Wyoming do not have an income tax.