income tax

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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

References in periodicals archive ?
Mertens, Law of Federal Income Taxation (Chicago, IL: Callahan and Co.
With Federal Income Taxation of Corporations, tax is learned through critical thinking and analysis, not by repetition and memorization.
Code section 409A is important because plans subject to 409A must comply with documentary and operational guidelines, or a plan participant may be subject to immediate federal income taxation and penalties.
IRC section 103 specifically exempts from federal income taxation the interest income from state and local government obligations; thus, the interest income on municipal bonds is tax-exempt at the federal level.
Material has been selected and organized in such a way so that teachers can adopt various approaches: an intensive technical analysis, a problem-oriented approach, a consideration of the policies that underlie the technical tax structure, or a survey of the principal elements of the federal income taxation of partnerships and S corporations.
Federal Income Taxation of Passive Activities, by Michael Carnevale, Deborah Harrington and Amy Sutton (WG&L, 2006), is a valuable reference that contains quick answers on how to minimize the tax consequences of the passive activity loss rules.
Some of the RIA and WG&L materials to be available include: RIA Federal Tax Coordinator 2d, RIA United States Tax Reporter, RIA (delete Tax) Citator 2d, Federal Income Taxation of Corporations and Shareholders and Federal Taxation of Income, Estates and Gifts.
The end result: Cooperative housing corporations, many of which went for years without facing Federal income taxation, now can be taxed on non-member income which exceeds non-member expenses.
This text for law students studying tax law for the first time is designed to supplement casebooks used in traditional courses in federal income taxation.
14) For detailed background on this subject, see Dubroff, Broadbent, Blanchard and Duvall, Federal Income Taxation of Corporations Filing Consolidated Returns, [section] 72.
Bittker & Lawrence Lokken, Federal Income Taxation of Income, Estates and Gifts at [Paragraph] 20.
The Federal Income Taxation of Corporations, Partnerships, Limited Liability Companies, and Their Owners, 5th Edition

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