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Taxable income is gross income made by an individual or business that is considered taxable by a state or country, or both in the US. There are certain things, depending upon income level and other country-mandated deductions, that are reduced from the amount of income considered taxable. For example, a certain amount of contributions made toward a person’s 401k is not taxable income, and amounts deducted for social security payments in the US are usually removed and considered not taxable either.
The degree to which your income is taxable is dependent, in a progressive tax system, on certain allowable deductions. If you make income below the poverty level, it’s unlikely that you’ll pay much in the way of taxes, if any at all. People with middle incomes are granted individual deductions for self-support when they file their taxes, and also for the support of any others in their home, like spouses and dependent children. These deductions are subtracted from gross income levels to determine your tax bracket or tax rate when you are filling out income tax forms.
There are a number of defined deductions, like donations to charity, payment for childcare expenses, and payment for education expenses that can reduce taxable income. When you’re filing federal taxes for the US, you’ll usually go through a list of deductions you can take, which are then subtracted from your gross pay. Once you’ve made all these subtractions, federal forms like the 1040 read to the effect of “This is your taxable income,” and then ask you to look up your tax based on this amount.
You’ll then be asked to compare the amount you were taxed with the amount of tax allowed for your income bracket. If you paid more than that allowed by your taxable income, you’ll get a refund, and if you paid less, you’ll owe the IRS money. However, there are certain deductions to taxes owed that can reduce total tax. These are called tax credits, and they are deducted not from your taxable income, but from the tax you owe on that income. Tax credits can quickly cheer up your mood if you can take quite a few of them, and they reduce the amount you owe to what you have already paid (or more than you have paid) through paycheck deductions.
There are certain types of income that can be taxed under very different rules than standard income made when you work for an employer. If you inherit large sums of money, win the lottery, make an enormous profit on stock or receive a huge, unexpected bonus, this income can be taxed at different levels and different percentages than other income considered taxable. Much depends upon the amount of extra money you make, win, or inherit, but these are all considered “income” of a sort. They do have to be accounted for on your federal tax returns, and may change the amount you must pay at the end of the year.
Oasis11- I agree with you. The Republicans always try to repeal the estate tax, but somehow it never gets passed. Maybe if there were more Republicans serving in congress the estate tax might get repealed.
Repealing the estate tax is part of the Republican Party platform so a majority is the one way to make that happen.
Good article- I would like to add that estate taxes are exempt for an inheritance of 3.5 million or less. Beyond the 3.5 million the tax rate goes to 45%. So anything over 3.5 million is taxed at the 45% rate.
While I understand that estate taxes offer the federal government a large source of revenue, I feel that it is unfair to tax an inheritance regardless of the amount.
Money in an estate has been taxed through the lifetime of the deceased; therefore taxing again upon the person’s death seems like double taxation. I feel that estate taxes should be repealed.