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Income Tax

Income tax is levied by the government on an individual's or entity's earnings or income. It is a key source of revenue for governments and is used to fund public services and programs such as education, healthcare, infrastructure, and social welfare. Income tax is typically calculated based on a person's total income, which can come from various sources such as wages, salaries, investments, and business profits.

What You Need To Know

Income tax is usually calculated on the taxable income, which is the amount left after deducting certain allowable expenses, exemptions, and deductions from the total income. Income tax rates are often structured progressively, where higher income levels are subject to higher tax rates. Different tax brackets apply to different income ranges.

Individuals and businesses are required to file an income tax return annually, reporting their income, deductions, and credits. The tax return helps determine the amount of tax owed or the potential refund. Many employees have income tax withheld from their paychecks by their employers. This is known as tax withholding and spreads out the tax liability over the course of the year.

Taxpayers may be eligible for various deductions and tax credits that reduce their overall tax liability. Deductions lower the taxable income, while credits directly reduce the amount of tax owed. Different types of income may be subject to different tax rates or rules. For example, investment income (capital gains, dividends) may have different tax treatment than earned income (wages, salaries).

Income tax returns are typically due by a specific deadline, often April 15th in many countries. Failure to file on time may result in penalties and interest. Countries can have different tax systems, such as flat tax rates, progressive tax rates, or regressive tax rates, which impact how income tax is calculated. Certain events, such as selling assets or receiving gifts, can trigger a tax liability. These are known as taxable events.