income tax


Also found in: Dictionary, Thesaurus, Medical, Legal, Acronyms, Encyclopedia, Wikipedia.
Related to income tax: Income Tax Rates

Income tax

A state or federal government's levy on individuals as personal income tax and on the earnings of corporations as corporate income tax.

Income Tax

A tax on a person's individual income from wages and salary, gambling winnings, and some other sources. Importantly, capital gains are usually excluded from income taxes and are subject to their own system of taxation. An income tax may be a flat tax, which means that all citizens pay the same percentage of their incomes to the government. Most of the time, however, an income tax refers to a progressive income tax, in which citizens with higher incomes pay higher percentages.

For example, one who makes $100,000 per year pays a higher percentage, called a marginal tax rate, than one who makes $25,000. However, it is important to note that the marginal tax rate does not increase for one's entire income, merely each dollar over a certain threshold. Suppose one pays 10% of one's income up to $25,000, and 20% thereafter. The taxpayer making $25,001 does not suddenly have to pay 20% of his/her entire income merely on the one dollar over $25,000. That is, he/she owes 10% of $25,000 (or $2,500) and 20% of the $1 over that (or $0.20). All things being equal, this taxpayer owes $2,500.20 in taxes. See also: Adjusted gross income.

income tax

A tax levied on the annual earnings of an individual or a corporation. Income taxes are levied by the federal government and by a number of state and local governments. One set of rules applies to individual income and another to corporate income. The size and structure of an income tax greatly influence security prices and investor decisions.

income tax

a DIRECT TAX imposed by the government on the INCOME (wages, rent, dividends) received by persons. The government uses income tax in order to raise revenue (see BUDGET), as a means of redistributing income (see DISTRIBUTION OF INCOME) and as an instrument of FISCAL POLICY. Income tax is usually paid on a progressive scale so that the greater the individual's earnings, the greater the rate of tax which is levied, up to some predetermined upper limit (currently 40% in the UK); low levels of income are usually tax exempt (by granting individuals an INCOME TAX ALLOWANCE), while the remainder is taxed according to various bands of income at rising tax rates up to the upper limit. In the UK, for example, there are currently three taxable income bands with taxable income up to £2,090 being taxed at 10%; £2,091 to £32,400 being taxed at 22%; and above £32,401 being taxed at 40% (as at 2005/06).

In the UK, the INLAND REVENUE assesses and collects taxes on behalf of the government for a fiscal year from 6 April to 5 April the following year.

Ideally, a progressive income tax structure should promote social equity by redistributing income but also encourage enterprise and initiative by avoiding penal rates of taxation at the upper end of the scale and, together with the SOCIAL SECURITY provisions, provide suitable incentives to work at the lower end of the scale. See DISTRIBUTION OF INCOME.

income tax

a DIRECT TAX levied by the government on the INCOME (wages, rent, dividends) received by households in order to raise revenue and as an instrument of FISCAL POLICY. Income tax is usually paid on a progressive scale (see PROGRESSIVE TAX). In the UK, the INLAND REVENUE assesses and collects taxes on behalf of the government for a fiscal year starting 6 April to the following 5 April. Taxes such as CAPITAL GAINS TAX and WEALTH TAX also impinge upon individuals but are quite separate in their scope and calculation.

Changes in income tax rates can be used as part of fiscal policy to regulate the level of AGGREGATE DEMAND, increases in tax serving to reduce DISPOSABLE INCOME available for consumption spending, while decreases in tax increase disposable income. Income taxes can also be used to affect the distribution of incomes in society in line with the government's social policy In the UK, there are currently (2005/06) three taxable income bands (that is, income after deduction of tax allowances): taxable income up to £2,090 is taxed at 10%; £2,091 to £32,400 is taxed at 22%, and above £32,401 it is taxed at 40%. See TAXATION, PRINCIPLES OF TAXATION, INCOME TAX SCHEDULES.

income tax

A tax on income. A simple concept, but one that requires thousands of pages of IRS statutes, regulations, revenue rulings, and court interpretations to explain. See the IRS Web site at www.irs.gov.

References in periodicals archive ?
The closest analogy we have in current law is the Earned Income Tax Credit, which the government admits has an error or fraud rate exceeding 25 percent.
To finance the war, Congress turned the income tax into a mass tax.
Individual Income Tax Return if Enterra trust units are held within a qualified retirement plan.
86-272, a multi-jurisdictional taxpayer is unable to depend on a single standard when determining whether to file a net income tax return in a state in which its activities, in addition to the solicitation of sales of TPP, consist solely of delivering TPP to in-state customers in company-owned vehicles.
Another alternative for clients with relatively low risk tolerance is mutual funds that invest in federal government treasury bonds, whose earnings are free from state income tax, or state and local (municipal) bonds, whose earnings are free from federal income tax (and, in many states, free from state income tax if the bonds are issued by the client's state of residence and its political subdivisions).
The movement against the income tax has lately adopted one of the tropes that define an on-the-rise minority in modern America: Its members want to be called what they call themselves--the "tax honesty" movement--and not be slapped with the pejoratives that most people have known them by (if aware of them at all).
When Congress passed a primitive income tax bill in 1862, Lincoln's defiant treasury secretary, Samuel Chase, ignored the law, preferring to fund the war through more government borrowing (sound familiar?
If they choose to donate the stock, their total income tax savings (as Baltimore residents) is $2,200.
property as effectively connected to a trade or business; attach the appropriate statement to a timely filled income tax return that reports income from U.
Tax Foundation research has shown that for the hardest-hit taxpayers, the estate tax has the same impact as would a doubling of the top income tax rate.