Taxation is one of those subjects that everyone seems to know little about. This is unfortunate because tax is one of the key ways in which the government provides revenue for public services. Without tax revenues, government programs and projects would be much more difficult to implement. Without tax revenues, the ability of the government to deliver public services and programs would be severely limited. Without tax revenues, the government would be forced to resort to different methods of finance such as borrowing and other expensive solutions. Without tax revenues, the government would also suffer from a lack of confidence in the ability of its institutions and agencies to deliver when it comes to important services and programs.
Taxation has two basic parts: income tax and corporate tax. Both of these types of taxes are calculated based on the amount of income a person or business earns and through what kind of activity they perform. In general, there are two types of taxes: progressive and regressive. Progressive tax systems supply the greatest amount of tax relief to low and modest-income taxpayers while providing substantial tax savings to higher-income taxpayers. Regressive tax systems provide smaller tax refunds and larger tax savings to higher-income taxpayers.
Taxation itself is divided into many categories such as estate tax, inheritance tax, and property tax. There are also several special tax rates such as the Alternative Minimum Tax (AMT), the Social Security Tax, and the Self-Employment Tax. These categories of taxation are complex and often overlooked by individuals and small businesses alike. That is why there exists the Internal Revenue Service (IRS) which is responsible for administering and collecting many of the different kinds of taxes.
The process of taxation begins with determining what is called an “indirect” income. This includes any kind of income from wages, business profits, dividends, and interest. Indirect taxes are always the first to be paid and subsequently accrue to the taxable account. After receiving an indirect income the individual or business must determine whether the income is taxable or not.
If the amount of the income is taxable the individual or business owes the federal tax. However, if it is not taxable there is an option known as a “pass-through” income. This means that the individual or business only pays taxes on the portion of their income that is directly attributable to their business activities. Businesses commonly pass through income taxes when purchasing property, gaining interest, or receiving rental income. Examples of these indirect taxes are Sales Tax, Corporate Tax, Self-Employment Tax, and Sales Voluntary Transfers.
It is important to understand the many types of taxes levied by the IRS. Taxation varies greatly between the states, provinces, and the federal government. It is essential that all taxpayers are knowledgeable of the various types of taxation that they may owe. With the help of a Certified Public Accountant, low-income taxpayers can learn how to plan their taxes so that they are proactive about paying their fair share. In addition, CPA’s can assist taxpayers with the many questions that they may have about tax laws, tax relief programs, and other tax-related issues.