Personal Income Tax

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A personal income tax is a tax imposed on the financial income of individuals. Personal income tax is based on the taxpayer's total income, while allowing for some deductions. When taxing personal income, the tax is imposed on an "income event." The event may be the earning of wages, an inheritance of money, or the sale of real estate or stock, for example. Personal income tax is often collected on a "pay-as-you-earn" basis, with corrections made after each tax year. The corrections will result in one of two things: Taxpayers will either have to pay the government if they have not paid enough in taxes during the year, or taxpayers will receive a refund from the government if they have overpaid during the year.

Taxing income is a modern innovation. It assumes a few things, such as reasonably accurate accounts, an understanding of receipts that is common in nature, a money economy, an orderly society that had reliable records, as well as a common understanding of expenses and profits. In history, taxation on wealth and ownership of the means of production—slaves or land, and social position—was mostly practiced. In the United States, the first income tax was imposed in 1861 at 3 percent of all incomes that were over $800. This was implemented so the country could help pay for the American Civil War effort. The tax was at first repealed, but another income tax took its place in 1862. The idea was never lost. Today, the federal government makes up to 60 percent of its revenue through personal income taxes. In 2000, the United States were able to contribute a substantial amount—$1 trillion from personal income and $200 billion from corporations—to government operations and public services through income tax.

The tax code for personal income taxes allows for certain deductions to be made by taxpayers that enable them to reduce their tax liability by reducing their total taxable income. In some circumstances, they may allow losses from one type of income to be counted against another. Other deductions may include monetary tax credits allocated based on the number of dependents the taxpayer has, a percentage deduction for mortgage interest that has been paid throughout the year, and a percentage deduction for gifts the taxpayer gave to nonprofit organizations throughout the year.

\"Tax net\" refers to the types of income that is taxed, such as capital gains, interest income, and personal wages. Different types of income are typically taxed at different rates, while some income may not be taxed at all. Capital gains (income made from investments) may be taxed either when income is realized—when shares are sold, for example—or when income is incurred, such as shares appreciating in value. Capital gains taxes may also be imposed when real estate is sold. Interest income, such as from savings accounts, may be taxed as either personal earnings or as a realized property gain. In regards to personal earnings, taxes may include only true wages (where labor, skill, or investment is required), or taxes may also include income, such as from gambling wins or gifts.

There are three basic systems for levying personal income taxes: progressive, regressive, or flat. A progressive tax bases taxes on the amount of income earned—the more income earned, the higher percentage it will be taxed. A flat tax taxes all earnings at the same rate.

A regressive tax will tax income only up to a certain amount, so a person making more money will pay more in taxes, but it will be a smaller portion of their overall income. Likewise, a person making less money will pay a slightly larger portion of their taxes, but it will be a lesser overall amount than the person making more money.

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