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Questions and Answers
What is the primary purpose of income tax?
What is the primary purpose of income tax?
What type of tax system taxes higher income earners at a higher rate than lower income earners?
What type of tax system taxes higher income earners at a higher rate than lower income earners?
What is the income earned by an individual or business that is subject to income tax?
What is the income earned by an individual or business that is subject to income tax?
What is the document filed with the government to report income, claim deductions and credits, and calculate tax owed?
What is the document filed with the government to report income, claim deductions and credits, and calculate tax owed?
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What is the tax rate applied to the last dollar of income earned?
What is the tax rate applied to the last dollar of income earned?
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What is the term for postponing tax payments to a future period, often to reduce tax liability?
What is the term for postponing tax payments to a future period, often to reduce tax liability?
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What is the term for legal strategies to minimize tax liability, such as claiming deductions and credits?
What is the term for legal strategies to minimize tax liability, such as claiming deductions and credits?
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What is the term for illegal activities to avoid paying taxes, such as hiding income or claiming false deductions?
What is the term for illegal activities to avoid paying taxes, such as hiding income or claiming false deductions?
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Study Notes
Definition and Purpose
- Income tax is a type of tax levied by governments on the income or profits earned by individuals and businesses.
- The primary purpose of income tax is to generate revenue for the government to fund public goods and services.
Types of Income Tax
- Progressive Tax: A tax system where higher income earners are taxed at a higher rate than lower income earners.
- Regressive Tax: A tax system where higher income earners are taxed at a lower rate than lower income earners.
- Proportional Tax: A tax system where all income earners are taxed at the same rate, regardless of income level.
Income Tax Components
- Taxable Income: The income earned by an individual or business that is subject to income tax.
- Tax Deductions: Expenses that can be subtracted from taxable income to reduce the amount of tax owed.
- Tax Credits: Direct reductions in the amount of tax owed, often provided for specific expenses or activities.
Income Tax Filing
- Tax Return: A document filed with the government to report income, claim deductions and credits, and calculate tax owed.
- Tax Filing Status: The category that determines the tax rates and deductions applicable to an individual, such as single, married, or head of household.
Income Tax Rates
- Tax Brackets: Ranges of income that are taxed at a specific rate.
- Marginal Tax Rate: The tax rate applied to the last dollar of income earned.
- Effective Tax Rate: The average tax rate paid on total income, taking into account deductions and credits.
Income Tax Planning
- Tax Deferral: Postponing tax payments to a future period, often to reduce tax liability.
- Tax Avoidance: Legal strategies to minimize tax liability, such as claiming deductions and credits.
- Tax Evasion: Illegal activities to avoid paying taxes, such as hiding income or claiming false deductions.
Definition and Purpose
- Governments levy income tax on individuals' and businesses' income or profits to generate revenue for funding public goods and services.
Types of Income Tax
- Progressive tax: higher income earners are taxed at a higher rate than lower income earners.
- Regressive tax: higher income earners are taxed at a lower rate than lower income earners.
- Proportional tax: all income earners are taxed at the same rate, regardless of income level.
Income Tax Components
- Taxable income: the income subject to income tax.
- Tax deductions: expenses subtracted from taxable income to reduce tax owed.
- Tax credits: direct reductions in tax owed for specific expenses or activities.
Income Tax Filing
- Tax return: a document filed with the government to report income, claim deductions and credits, and calculate tax owed.
- Tax filing status: determines tax rates and deductions applicable to an individual (e.g., single, married, head of household).
Income Tax Rates
- Tax brackets: ranges of income taxed at a specific rate.
- Marginal tax rate: the tax rate applied to the last dollar of income earned.
- Effective tax rate: the average tax rate paid on total income, considering deductions and credits.
Income Tax Planning
- Tax deferral: postponing tax payments to reduce tax liability.
- Tax avoidance: legal strategies to minimize tax liability (e.g., claiming deductions and credits).
- Tax evasion: illegal activities to avoid paying taxes (e.g., hiding income or claiming false deductions).
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Description
Learn about the different types of income tax, including progressive and regressive tax systems, and their purpose in generating revenue for governments.
