What are Income Taxes?

Income taxes refer to any type of tax that is assessed on income earned by individuals or entities. In the United States, income taxes apply on both federal and state levels, with each state having its own tax regulations and rates. It is generally applied to all types of income, including wages, salaries, tips, interest, dividends and rental income. The exact amount of income tax that an individual or entity owns depends on a variety of factors such as the amount of income earned, filing status, deductions and credit.

Key Takeaways

• Income taxes refer to any type of tax that is levied on income earned by individuals or entities.
• This may include federal income taxes, state income taxes and local income taxes.
• Income taxes are a primary source of revenue for governments, which are used to finance public services, meet government obligations, and support various initiatives.

Types of Income Taxes

In the United States, there are a few main types of income taxes, including:

• Individual Income Tax: Also known as personal income tax, individual income tax is the most common type of income tax in the United States. It is levied on an individual’s wage, salary, and other types of income. Thanks to mechanisms such as exemptions and deductions, most individuals do not end up paying taxes on all of their income. In most cases, individual income taxes are regulated by the state government where the individual lives and earns income. Each state has its own tax laws and regulations that determine tax rates, brackets and applicable deductions.
• Corporate Income Tax: Corporate income taxes are assessed on the income earned by corporations, partnerships and other businesses entities. Depending on the exact business structure, the way in which the company’s income and expenses are reported can differ. Nevertheless, since corporations are generally considered separate legal entities, they report their own income and expenses on their tax return. 
• Capital Gains Tax: This tax is applied to the profit earned from the sale of a capital asset. A capital asset is usually held for investment purposes, such as stocks, bonds, real estate and other investments. A capital gain is the profit that results from the sale of a capital asset for a price that is higher than its original purchase price. Capital gains are taxable and must be reported on the taxpayer's income tax return. The specific tax rate for capital gains is influenced by multiple factors, including the type of asset sold, the duration of time the asset was held, and the taxpayer's income bracket.

Bottom Line

Overall, income taxes play an important role in the United States government and tax system. They are used to fund important public services and programs such as education, healthcare and national defense.

It is crucial to remain informed and up-to-date on the applicable income tax laws and regulations to ensure compliance and avoid penalties. Get personalized support on your tax situation from one of our qualified tax lawyers at Attorney At Law.