What is income tax?

A tax is the amount of money paid to the government on the revenue earned by the individual or business organization. It acts as an income for the government and an expense for the individual or business organization. There are different regulations regarding filing an income tax return in other countries.

Federal income tax

A tax that the Internal Revenue Services (IRS) charges on the income earned by a person, organization, institution, etc., is known as the federal income tax. It is levied on the income earned by the people in various forms. Income is achieved through different processes and sources. The person who pays the income tax is known as the taxpayer.

Advantages of filing a federal income tax return

• The tax paid by the taxpayer helps the government to bear various expenditures.
• The government uses the revenue generated in the form of tax for the economic development of the country.
• The government uses the money to provide welfare services and facilities to the general public.
• It helps in infrastructural development and generates employment opportunities.
• It helps to eliminate illegal activities, corruption, black money, etc., from the country.

Internal Revenue Services

Internal revenue service is also known as IRS. The IRS is a United States institution that collects the tax. The goal of the IRS is to charge the tax on the income of the people, institutions, and organizations as per the federal tax law and collect the tax revenue. The role of the IRS is

• To provide the process for filing tax returns.
• To provide the services to the taxpayers.
• To deal with the tax enforcement.

Besides this, the IRS also helps inspect illegal activities and provides information about the deductions and exemptions under the federal income tax. The IRS also allows pension plans and retirement plans to the public.

Types of Income

• Income from salary: Tax is charged on the income earned by the taxpayer in the form of salary from any job, career, or opportunity.
• Income from house property: Tax is charged on the income earned by the taxpayer by renting the house or subletting house property to another person.
• Income from capital gains: Tax is charged on the income earned in the form of capital gains. By selling long-term assets and short-term assets, a taxpayer earns revenue and is liable to pay tax on it.
• Income from business and profession: Tax is charged on the income earned from the business or profession. Professions include lawyers, doctors, teachers, etc.
• Income from other sources: Tax is charged on the income earned by the taxpayer from different sources such as accumulated dividends, director fees, etc.

Tax filing status under federal income tax

• Single person: A single individual acts as a taxpayer and pays the tax on the federal gross income as per the guidelines issued by the IRS under the federal tax law.
• Married filing jointly: A couple decides to file the federal tax payment return jointly by taking advantage of the standard deduction and filing the tax as given by IRS.
• Married filing separately: A married couple will file the federal tax return separately rather than filing it jointly. They act as a single taxpayer.
• Head of household: A person who pays the federal tax payment is unmarried or acts as unmarried. This is because it is helpful to the parents to avail the benefits of the tax.
• A widow with a dependent child: A woman whose spouse's death made her widow. She gets the tax benefit and pays less federal income tax return.

A person will file the tax under the status where they get more tax benefits and the tax payment is less on their income.

The tax rates are:

• 10 percent
• 12 percent
• 22 percent
• 24 percent
• 32 percent
• 35 percent
• 37 percent

The above seven tax rates are different for single-payer, married filing separately, married filing jointly, head of household, a widow with dependent child.

Single person

• A person whose age is less than 65 years must pay if their gross income is $12,400 or more.
• A person whose age is 65 years or more than 65 years is required to pay tax if their income is more than $14,050.

Married filing jointly

For couples filing the federal income tax jointly have a standard deduction of $24,800. It has been increased by $300 in the current year.

Married filing separately

For couples filing the federal income tax separately have a standard deduction of $12,400.

Head of Household

For the head of household filing the federal income tax under the same head has a standard deduction of $18,650.

A widow with a dependent child

The qualifying status of the widow is that she can file the federal income tax return for two years after the death of her spouse. After two years, she is qualified to file the federal income tax return as per the status of a widow with a dependent child. The standard deduction for the widow with a dependent child under the federal income tax return is $24,800.

Rules for filing a federal income tax return

• The tax rate and brackets are charged only on the taxable income of the taxpayer.
• The gross salary should be reduced by the standard deduction allowed by the IRS.
• The taxpayer's gross income is up to standard deduction, and then the tax rate is zero percent.
• After deducting the standard deduction, the resulting amount is taxable on which IRS charges tax.

The procedure of filing a federal income tax return

• The first step is to fill the IRS Form 1040 or Form 1040-SR manually or online.
• Next, with the help of the available tax software, file the federal income tax return.
• If a person cannot file the return, they can hire a tax expert and file the return.

Steps to file a federal income tax return

• Collect all the relevant documents regarding filing the federal income tax.
• Select the filing status under which a taxpayer wants to pay the tax.
• Identify and choose how to file the federal income tax return.
• Determine if the gross income is subjected to the standard deduction.
• Learn about the tax payments and the tax charged on the gross income.
• File the tax return.

Tax credit under federal income tax return

• An amount that allows the taxpayer to be deducted from the taxable income is a tax credit.
• Tax credits are better than tax deductions.
• A taxpayer having less than $3,650 investments can avail the benefit of the tax credit.
• A taxpayer must have a social security number for the tax credit and tax payment.
• A taxpayer should be a citizen of the United States.

Tax refund

A tax refund is a process where a taxpayer gets reimbursement for excess tax paid. As per the IRS, the taxpayer is entitled to a refund from the government if the taxpayer has paid excess tax. It can be said that the money which is entitled to be refunded is paid acts like a loan to the IRS, but a taxpayer does not receive interest on it.

Context and Applications

This topic is significant in the professional exams for both undergraduate courses & postgraduate courses and competitive exams, especially for:

• Masters of Business Administration
• Bachelor of Business Administration
• Masters of Science in Taxation

Practice Problems

Question 1: Which of the following collects federal income tax returns?

(a) Internal Revenue Services

(b) Federal Reserve System

(c) Central Bank

(d) None of the above

Answer: (a)

Explanation: Internal revenue service is the proper authority that is responsible for the collection of taxes. It is the supreme authority in the United States.

Question 2: Which of the following is status filing for federal tax returns?

(a) Single person

(b) Married filing jointly

(c) Head of household

(d) All of the above

Answer: (d)

Explanation: Every head mentioned in the options is one of the subheads in the federal tax filing. So, an individual can file it individually or collectively in the case of married ones. Also, an individual can file the return under the classification as household head.

Question 3: Which form is required while filing a federal income tax return?

(a) Form 26

(b) Form 97

(c) IRS Form 1040

(d) All of the above

Answer: (c)

Explanation: The IRS 1040 form provided by the IRS (Internal Revenue Service) can be used to file the income tax return.

Question 4: How many tax rates are there under federal income tax returns?

(a) 5

(b) 6

(c) 7

(d) 8

Answer: (c)

Explanation: The correct classification for a tax rate is seven as per the federal income tax return rules.

Question 5: When a taxpayer pays more amount to the government when filing the tax return is known as?

(a) Tax refund

(b) Tax credit

(c) Tax return

(d) Tax benefit

Answer: (a)

Explanation: A tax refund represents the excess amount paid to the government. The tax refund is treated as per the rules of the government.

Common Mistakes

Students are not aware of the tax laws and regulations in different countries. The tax law is different for every country. They should also try to understand the meaning of tax refunds and tax returns. They get confused with the procedure of filing tax returns.

Related Concepts

While studying this topic, it is important to read the following topics to get a better knowledge:

• Income tax regulations
• Internal Revenue Services
• The procedure of filing income tax
• Tax rates and deductions