Taxes have done great to raise nations throughout history. If we look back, the income tax term was disclosed in England to support the Napoleonic War. Not just in war but then gradually initiated to support government social welfare programs. Throughout the times, Income tax has greatly supported different social activities and generated revenue to initiate the programs at a higher level.
Income tax is the tax imposed on individuals, companies, or organizations by government authority under their jurisdiction. The tax is collected throughout the country based on the income generated individually. In every country, rules and laws differ in paying tax, but they all generally follow a progressive rule that defines the more you earn, the more you pay.
We have illustrated the information about income taxes descriptively. So, look into this article to know more about income tax, what are income taxes used for, and different types of income tax.
What Are Income Taxes, And What Are Their Type?
Don’t you know what is the best definition of income tax? Here is the best universal income tax definition that every country’s tax collection territory agrees with:
It is the government-imposed tax on individuals and business companies to initiate government programs, which include education programs, social services programs, or programs to unleash the hidden talent of the country. Taxpayers follow the progressive tax rule; you must pay according to the profits.
Income taxes are the form of taxation imposed by the government on businesses, individuals, organizations, or companies based on the profit generated. The income tax is solely collected to support the government activities such as infrastructure development and defense or social service programs to raise the standards of the whole nation.
The government regularly checks on taxation rules and updates them following the development needs. Moreover, to check on the specific rules concerning to specific country, you need to consult the revenue collection territory of that country.
Example Of Income Tax:
Let’s look into an example of income tax to illustrate income tax:
Suppose Diana has an income of 20,000$ per year. And in her country, income tax is progressive, the higher the earning, higher would be the tax. If her country’s taxation has the following taxation code;
- 0 to 10,000$ = 0% tax
- 10,000 to 20,000 = 10%
Diana’s income falls under the second code. So let’s calculate her tax percentage;
- 20,000 multiplied by 0% = 0
- 20,000 multiplied by 20% = 4,000
So, Diana’s total income tax would be 4000$.
What Are The Types Of Income Tax?
There are various types of income tax. The types of tax vary from country to country depending on the types of economy generated. Below are the most common types of income tax:
Personal Income Tax
It is the income tax levied solely on individuals based on their income. Personal income tax is typically imposed on daily wages, salary, bonuses, tips, rental income, or any other type of individual income. The specific rules for deduction may vary from country to country.
Here is an example of personal income tax to understand the definition deeply:
For example, if a person’s salary is 40, 000$, which comes under employment income tax. Based on personal income tax, that person has to pay the prescribed amount, or it will be deducted from the account.
Corporate Income Tax
The corporate income tax is levied on businesses, corporations, or agencies based on their profits. It is collected from the profits earned through business activities and follows a different mechanism than personal income tax. Here are some key considerations of corporate income tax;
- Corporate income tax is imposed on an organization after deducting all the costs such as wages, operating costs, and salaries of workers, so specifically, it is levied on the profit gained by any form of corporate.
- Corporate agencies must file an annual income tax by reporting income generation, expenses, salaries, and all other expected costs.
- The scale of the tax deduction depends on the business’s profit and may vary.
Self-Employment Tax
Self-employment tax is imposed on self-running businesses such as freelancing. These taxes are designed for individuals who work solely for themselves without any contractor and are the business’s sole owners.
Self-employment tax covers only two components of the tax for individuals who work for themselves: Medicare and social security. However, one must check the jurisdiction updates to learn about self-employment tax.
Capital Gains Tax
It is also called investment income tax or simply income tax. It is the income tax imposed on gains or profits earned by selling the assets like stocks and real estate. Let’s look into an example to illustrate it:
When a person sells an asset higher than its original price, the gain will be capital gain, and tax is solely imposed on the gain earned by selling the assets.
What are income taxes used for?
Do you want to know what income taxes are used for? Sure, here is the prompt;
- The collected income tax from all sorts of income plays a significant role in revenue generation for the country’s welfare.
- The income tax is used to initiate government programs, including education programs, social services programs, or programs to unleash the hidden talent of the country at a higher level.
- Taxes are devised to implement government and social policies for the country’s welfare. The taxation system is used for several purposes in different countries while following different jurisdiction systems.
Conclusion
It is important to consider that every country has a system of regulatory bodies for revenue services that operate over the rules and regulations of the country’s legal body. Each type of income tax in every country must have its different jurisdiction.
So specifically, you need to consult that country’s regulatory body to know about the payable tax or any other information related to paying income tax. Therefore, it is always recommended to consult the laws and regulations of your specific country.
