Income Tax Principles

• Tax is a payment imposed on a taxpayer by a governmental unit.
• Incoming taxes, treated as income by the government, are revenue.
• The ability to Pay Principle states that individuals with higher incomes should pay more in taxes than those with lower incomes.
• Voluntary Compliance requires that the individual is responsible for filing a tax return and paying taxes.
• Tax Evasion is the willful failure to pay taxes.
• The Internal Revenue Service (IRS) is an agency of the U.S. Treasury
• The IRS collects income taxes and enforces tax laws
• An Audit involves an examination of income taxes by the IRS.
• The predicted 2024 U.S. Revenue is $4,919 billion.
• Corporate Income Taxes make up 11% of the 2024 U.S. Revenue
• Individual Income Taxes make up 49% of the 2024 U.S. Revenue
• Social Insurance & Retirement Taxes make up 35% of the 2024 U.S. Revenue
• Other Taxes make up 5% of the 2024 U.S. Revenue
• The predicted 2024 U.S. Expenses are $6,752 billion.
• Education makes up 4% of the 2024 U.S. Expenses
• Veteran's Benefits & Services makes up 5% of the 2024 U.S. Expenses
• Income Security makes up 10% of the 2024 U.S. Expenses
• National Defense makes up 13% of the 2024 U.S. Expenses
• Transportation makes up 2% of the 2024 U.S. Expenses
• Other spending makes up 5% of the 2024 U.S. Expenses
• Social Security makes up 22% of the 2024 U.S. Expenses
• Health makes up 13% of the 2024 U.S. Expenses
• Medicare makes up 13% of the 2024 U.S. Expenses
• Net Interest makes up 13% of the 2024 U.S. Expenses
• The projected U.S. Deficit for FY 2024 is $1.83T
• The projected U.S. Revenue for FY 2024 is $4.92T.
• The projected U.S. Spending for FY 2024 is $6.75T

Types of Taxes

• A Proportional or Flat tax has a tax rate that remains the same regardless of income.
• A Progressive Tax takes a larger share of income as the amount of income grows.
• A Regressive Tax takes a smaller share of income as the amount of income grows.
• Income tax is progressive, meaning that tax rates increase as taxable income increases.
• A tax rate is applied to an income range, or tax bracket.
• Marginal Tax Brackets for single filers in 2025:
• 10% tax bracket: $0 - $11,925
• 12% tax bracket: $11,926 - $48,475
• 22% tax bracket: $48,476 - $103,350
• 24% tax bracket: $103,351 - $197,300
• 32% tax bracket: $197,301 - $250,525
• 35% tax bracket: $250,526 - $626,350
• 37% tax bracket: $626,351+
• Marginal Tax Brackets for married filing jointly in 2025:
• 10% tax bracket: $0 - $23,850
• 12% tax bracket: $23,851 - $96,950
• 22% tax bracket: $96,951 - $206,700
• 24% tax bracket: $206,701 - $394,600
• 32% tax bracket: $394,601 - $501,050
• 35% tax bracket: $501,051 - $751,600
• 37% tax bracket: $751,601+
• Marginal Tax Brackets for head of household in 2025:
• 10% tax bracket: $0 - $17,000
• 12% tax bracket: $17,001 - $64,850
• 22% tax bracket: $64,851 - $103,350
• 24% tax bracket: $103,351 - $197,300
• 32% tax bracket: $197,301 - $250,500
• 35% tax bracket: $250,501 - $626,350
• 37% tax bracket: $626,351+
• The U.S. income tax system is progressive, where the effective tax rate increases as income increases.
• State Income Tax can be either proportional/flat or progressive.
• Examples of Proportional/Flat Tax states:
• Pennsylvania (3.07%)
• Indiana (3.23%)
• Michigan (4.25%)
• Colorado (4.55%)
• Illinois (4.95%)
• Utah (4.95%)
• North Carolina (4.99%)
• Kentucky (5.00%)
• Massachusetts (5.00%)
• New Hampshire (5.00% on dividends and interest only)
• Examples of Progressive Income Tax states:
• Alabama (2.00% to 5.00%)
• Arizona (2.59% to 2.98%)
• Arkansas (2.00% to 5.50%)
• California (1.00% to 12.30%)
• Connecticut (3.00% to 6.99%)
• Delaware (0.00% to 6.60%)
• Georgia (1.00% to 5.75%)
• Hawaii (1.40% to 11.00%)
• Idaho (1.13% to 6.50%)
• Iowa (3.33% to 8.53%)
• Kansas (3.10% to 5.70%)
• Louisiana (1.85% to 4.25%)
• Maine (5.80% to 7.15%)
• Maryland (2.00% to 5.75%)
• Minnesota (5.35% to 9.85%)
• Mississippi (0.00% to 5.00%)
• Missouri (1.50% to 5.30%)
• Montana (1.00% to 6.75%)
• Nebraska (2.46% to 6.84%)
• New Jersey (1.40% to 10.75%)
• New Mexico (1.70% to 5.90%)
• New York (4.00% to 10.90%)
• North Dakota (1.10% to 2.90%)
• Ohio (0.00% to 3.99%)
• Oklahoma (0.25% to 4.75%)
• Oregon (4.75% to 9.90%)
• Rhode Island (3.75% to 5.99%)
• South Carolina (0.00% to 7.00%)
• Vermont (3.35% to 8.75%)
• Virginia (2.00% to 5.75%)
• West Virginia (3.00% to 6.50%)
• Wisconsin (3.54% to 7.65%)
• Regressive Tax Analysis in Pennsylvania
• Average price per gallon (pre-tax) (1/6/2025): $2.692 (82%)
• PA State Gas Tax: $0.576 (18%)
• Total price per gallon of gas, average: $3.268 (100%)
• Weekly gallons of gas used: 20
• PA State Gas Tax weekly: $12
• As a percentage of weekly gross pay:
• $25,000 annual salary: 2.40%
• $75,000 annual salary: 0.80%
• $150,000 annual salary: 0.40%
• The percent impact of the PA state gas tax goes down as gross pay goes up, making it regressive.
• Progressive Tax Examples: U.S. Income Tax and some State Income Taxes
• Proportional or Flat Tax Examples: Some State Income Taxes and Medicare Taxes
• Regressive Tax Examples: Sales Taxes, Social Security Taxes, Tobacco Taxes, Gasoline Taxes and Alcohol Taxes

Gross Income

• Gross income refers to all taxable income received.
• Earned income refers to money earned from working.
• Unearned income refers to passive income not from working.
• Examples of Earned Income: Wages, Salaries, Tips and Business income
• Examples of Unearned Income: Interest, Dividends, Alimony, Social Security, Unemployment compensation, Scholarships/Grants and Prizes/Awards
• Examples of Nontaxable Income: Child support, Gifts, Inheritances, Life insurance benefits, Veteran's benefits and Workers' Compensation benefits.
• Requirements for Single Dependents to file a tax return:
• No return needed if income is $5,050 or less
• Must file a return if:
• Unearned income was more than $1,300
• Earned income was more than $14,600
• Gross income was the larger of $1,300 or earned income (up to $14,150) plus $450
• Requirements for Single Dependents age 65 or older or blind to file a tax return:
• No return needed if income is $5,050 or less
• Must file a return if:
• Unearned income was more than $3,250 or ($5,200 if both 65 or older and blind)
• Earned income was more than $16,550 or ($18,500 if both 65 or older and blind)
• Gross income was larger of $3,250 or ($5,200 if 65 or older and blind), or earned income (up to $14,150) plus $2,400 or ($4,350 if 65 or older and blind)

Tax Filing Procedures

• Jan 1: First day of the calendar year; earnings begin.
• Whenever you start a new job:
• Complete a W-4 to indicate tax withholding preferences; a new W-4 is needed for each job.
• Self-employed individuals do not receive a W-4 and are responsible for making advance tax payments quarterly.
• Complete an I-9 to show eligibility for employment in the U.S.
• Dec 31: Last day of the calendar year; yearly earnings are final.
• Jan 29: Earliest day to submit tax returns for the previous year (likely requires W-2 to file).
• Jan 31: Deadline for employers to mail W-2s to employees.
  • Contact the employer if the W-2 is not received.
  • Multiple W-2s are received when working multiple jobs.
• Most people wait until after this date to file taxes, because it is difficult to accurately determine your taxes owed.
• Apr 15: Last day to submit income tax forms or request an extension.
• Oct 15: Deadline for those who received extensions.
• Key Tax Forms:
• I-9: Verifies eligibility to work in the U.S.
• W-4: Provides information for employers to determine how much money gets withheld from each paycheck.
• W-2: Reports annual earnings and taxes paid, received in January.
• 1099-NEC: Received if paid by a company as not an employee, potentially indicating taxes were not withheld.
• 1040: Used for personal income tax returns, calculates total taxable income.
• Filing status describes the tax-filing group.
• The options are single, married filing jointly, married filing separately, head of household, or qualifying widow(er).
• Taxable income is the income on which tax will be paid.
• Taxable Income = Gross Income - Adjustments - Deductions.

Tax Deductions and Credits

• Tax deductions: Subtracted from gross income, lowering taxable income.
• Can be a standard deduction or itemized deductions.
• Tax credit: A reduction of taxes owed
  • Reduces taxes more effectively than a tax deduction.
• Tax evasion: Willful failure to pay taxes.
• Tax avoidance: Using legal methods to minimize income taxes owed.
• Standard deduction: A stated amount subtracted from adjusted gross income if not itemizing deductions. For 2024 taxes, this deduction is $14,600, subject to yearly changes.
• Itemized deductions: Expenses subtracted from adjusted gross income to determine taxable income like:
• Medical and dental expenses beyond a specified percentage of income
• State and local income taxes
• Property taxes
• Home mortgage interest
• Gifts to charity
• Losses from theft or property damage
• Some moving expenses

Tax Filing Methods

• Old-fashioned Paper Filing:
• Pros: Full control over every part of the process
• Cons: Takes more time to file and get refunds compared to filing electronically and can be easier to make mistakes and miss deductions.
• Tax-preparation Software: pros Access to tax professionals, quicker returns, helps to get more credits and are able to e-file. But must have a computer, must be comfortable with technology and if a problem occurs, can be difficult to get assistance and can be costly.
• Professional Tax Preparers: helpful when going through a divorce, bought or sold a house, inherited money, or experienced a family death but are the highest cost and most susceptible to scams

Test your knowledge of income tax principles. Questions cover taxable income calculation, tax deductions vs credits, tax avoidance vs evasion, standard deductions, itemized deductions, and the role of the IRS. Also covers tax form and unearned income.