You just got your first paycheck from your first job and are pretty excited about it. You finally have money that you can call your own and spend it as you please. No more taking money from your parents and asking for an allowance. Hey, but what’s this? My paycheck does not reflect the proper figure. Where’s the rest of my money?
Sound familiar? Well, the rest of your money, as you put it, has gone into the pockets of Uncle Sam as personal income taxes. Who’s Uncle Sam? For the uninitiated, it is the Internal Revenue Service (IRS). The IRS is the federal agency that is responsible for collecting income taxes in the United States.
An Introduction To Personal Income Taxes
If you earn any income, whether by way of salaries, wages, interest, dividends, tips, etc., you have to pay personal income taxes to the IRS. Every American citizen that is making money (above a certain limit) has to pay income tax to the government.
In the case of most people, their employer will deduct what is known as payroll taxes from your paycheck and then hand over the remaining amount to you. These withheld payroll taxes are a portion of your income, deducted as tax, which is given to the IRS and is then credited to you at the time of filing your income tax return as withholdings.
Filing Personal Income Tax Returns
Most people think that just because their employer withholds taxes, their tax liability is met and they need not file an income tax return. But this is not true. Even if you pay taxes through withholding, you still need to file a return, in order to determine if you have to pay more taxes or are due a refund.
A return is filed according to your filing status. There are five types of filing status available for personal income taxes. These are:
What Is Taxed
Not all the income that you earn is taxed by the IRS; only your taxable income. Taxable income refers to your gross income, both earned and unearned, minus any allowable deductions, exemptions, and credits.
Depending on your filing status, the IRS allows certain adjustments and expenses that can be subtracted from your gross income, to reach your adjusted gross income.
Once you have figured out your adjusted gross income, you may be able to find some more reductions to minimize your taxable income. These are:
Once you have arrived at your taxable income, after deducting all allowed deductions, exemptions, and credits, you have to pay personal income taxes on this taxable income.
The rate of personal income tax once again depends on your filing status and your taxable income, and is preset each year by the IRS.
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