Income tax – It is a tax imposed by the government compulsorily from a financial percentage on the income received by individuals and companies within its jurisdiction, so that income tax revenue is an important source for governments: to pay its obligations, to use it to finance its activities and the public services it provides, and to provide the various goods it provides to citizens. Everyone who is subject to income tax must determine his tax obligations by submitting a tax return to the government annually.

Income tax creation

The origin of the income tax dates back to 1862 AD, when the United States imposed the first income tax in the country to help finance the Civil War. After the end of the war, the tax was abolished; and then it was restored in the early twentieth century, but now the payment of taxes is mandatory and the law holds those who evade them accountable, and in most governments there is a competent authority or department to collect taxes from citizens.

What are the types of income tax?

The following are the types of income taxes:

1- Individual income tax

Also called personal income tax, it is the tax imposed by the state on the different types of income received by the individual from wages, salaries, investments, etc. Individuals can reduce their taxable income by taking advantage of the discounts, exemptions, and credits provided by the state, and through the tax credit, the discount rate can be increased. On income tax, one of the providers of a series of tax deductions and exemptions is the Internal Revenue Service (IRS), which offers a series of deductions based on mortgage interest, a percentage of medical bills and dental bills, education expenses, and many other expenses.

2- Business Income Tax

It is the tax imposed by the state on large and small companies and self-employed contractors so that companies pay a tax on the profits they earn by having the owners and shareholders of the company report the amount of profits resulting from their work and then deduct the operating and capital expenses, and the difference between their business income and expenses (operating and capital income) is their taxable business income.

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What are the factors affecting income tax?

There are several factors that affect the amount of income tax that an individual has to pay, which are:

1: Taxable income

It is directly proportional to the tax rate, which means that the tax rate will generally increase as income increases, as the amount of taxable income you have determines what your tax bill will be.

2: Social status

The tax also depends on the marital status of the taxpayer; for example, the amount of tax due on an individual is affected if he is married or unmarried. The taxable head of the family has less taxable income than the unmarried individual.

3- Income adjustment

The total taxable income must be determined by summing up all earned income, whether a salary, wage, or tip, in addition to unearned income such as social security, retirement salaries, and dividend payments, and then subtracting expenses such as interest on loans and other expenses to obtain gross income.

4- Exemptions

After deducting the total income subject to income tax, all tax exemptions that can be deducted from the taxable income are excluded, including dependency exemptions that an individual can claim for his dependents.

5- Tax cuts

Taxpayers can request deductions on their tax payments, depending on the individual’s age, income, and marital status.

How does income tax work?

The tax process begins with the entity responsible for tax collection collecting it from its payers on all forms of income, whether from work, investments, interests, or pensions, in addition to other sources, and from this total income all expenses and exemptions are subtracted to obtain the adjusted gross income. Deductions are introduced to obtain the final taxable income, as most governments in different countries follow the progressive income tax system, which means that the rate of taxes imposed on individuals increases as their income increases, as well as on companies the greater their profit, and vice versa with low-income and low-profit companies .

What are the sources of income?

The taxable income comes from different sources, which are as follows:

Income from salaries: It includes everything that an individual receives from his job in return for the tasks he provides.
Income from Building Ownership: This is the income generated by the house or building, which may be owned and operated by the owner or rented.
Capital Gains Income: Income from profit or loss on the sale of a capital asset
Income from business or profession: This is the income that arises as a result of practicing a business or profession.
Income from other sources: This is income from bank savings accounts, fixed deposits, or others.

Things You Didn’t Know About Income Tax