Types of Income Tax

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).