Income tax

Income tax is a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations. Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens.

Types of Income Tax

There are several types of income tax, including personal income tax, corporate income tax, and taxes on capital gains and dividends.

Personal Income Tax

Personal income tax is a tax on an individual's earnings. It includes wages, salaries, and other types of income, such as from investments or rental property.

Corporate Income Tax

Corporate income tax is a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities.

Capital Gains Tax

Capital gains tax is a tax on the profit realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.

Dividend Tax

Dividend tax is a tax on dividends paid to shareholders of a company.

Tax Rates

Income tax rates may be progressive, proportional, or regressive. When the tax rate is progressive, taxpayers with higher incomes pay higher tax rates than those with lower incomes. Proportional tax rates are the same for all taxpayers, regardless of income. Regressive tax rates decrease as the taxpayer's income increases.

Tax Deductions and Credits

Income tax systems often grant a variety of tax deductions, credits, and exemptions that reduce the amount of tax liability owed by the taxpayer. This includes deductions for retirement contributions, education, and home mortgage interest.

Tax Evasion and Avoidance

Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts. Tax evasion often entails taxpayers deliberately misrepresenting their true state to the tax authorities to reduce their tax liability, and it includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.

Tax avoidance, on the other hand, is the legal use of tax laws to reduce one's tax liability. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system.

See Also

• Tax law
• Tax compliance
• Tax noncompliance

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