New year, new tax filing. Filing taxes may not be the easiest task, especially with its time-consuming forms and applications. Whether you file with help from a professional or on your own, calculating the precise amount you owe to the Internal Revenue Service (and vice versa) takes some time. You might not fully understand what is being taken out of your pay and why. That also varies depending on where you live and work.
Here’s a primer on income tax: what it is, how it works, how to calculate it, and which states don’t have it.
What is income tax? Income tax is a tax that governments put on income created by people and businesses within their jurisdiction. There is federal income tax, as well as state income tax. However, not all states have income tax. In 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 and government obligations and to provide goods for the public. For example, personal income taxes help fund Social Security, schools, and roads.
Types of income tax: Individual income tax, also called personal income tax, is placed on a person’s wages, salary, and other forms of income. This particular tax is generally imposed by the state. Depending on your circumstance, there are some exemptions, deductions, or credits that could make you eligible to not pay taxes on your income.
Tax brackets: What are the tax brackets for tax years 2024 and 2025? What to know ahead of the filing season: Business income tax is applied to corporations, small businesses, and self-employed people. The company, its owners, or shareholders must disclose their business income and then subtract operating and capital expenses. The difference is considered to be the company’s “taxable business income.”
Income tax is a tax that governments put on income created by people and businesses within their jurisdiction.
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, and 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. Does yours make the list? These eight states don’t have income tax.
What percent of my income is taxed? The percentage 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.
How to calculate income tax? To calculate income tax, 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.
