Tax season is upon us. For some, it may be your first time filing taxes. And even for those who have filed for years, taxes are not always the easiest task to tackle.
Here’s what you should know about income tax, what it is, how it works, how to calculate it and which states don’t have it.
What are the new 2023 tax brackets? Answers here
1099, W-4, W-2, W-9, 1040: What are these forms used for when filing your taxes?
What is income tax?
Income tax is a tax which governments put on income created by businesses and people within their jurisdiction.
There is federal income tax, as well as state income tax. However, not all states have income tax. For the jurisdictions that do, taxpayers must file income tax returns each year to see what they are accountable for.
The purpose of income tax is to pay for public services, government obligations and to provide goods for the public. For example, personal income taxes help fund Social Security, schools and roads.
Tax season 2023 officially started: Here are key deadlines to keep in mind.
Types of income tax
Individual income tax, also called personal income tax, is placed on an individual’s wages, salary and other forms of income. This particular tax is generally imposed by the state. Depending on your situation, certain exemptions, deductions or credits could make you eligible to not pay taxes on your income.
Business income tax is applied to corporations, small businesses and the self-employed. The company, its owners or shareholders would disclose their business income and then subtract operating and capital expenses. The difference would be the company’s “taxable business income.”
Additionally, many states have a personal income tax for their residents. But that doesn’t necessarily make them more expensive to live than states where there is no income tax.
Which states have no income tax?
There are eight states that do not have an income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire has no state tax on income, but it does make residents pay a 5% tax on income earned from interest and dividends.
Are you ready to file your taxes? Here’s everything you need to know to file taxes in 2023.
What percent of my income is taxed?
The percent of your income that is taxed depends on your specific situation: how much you make and your filing status. In short, the more income you earn, the more taxes you pay.
To calculate income tax, you add all forms of taxable income earned in a tax year. Next, find your adjusted gross income. Then, subtract any eligible deductions from your adjusted gross income.
