American income tax system
http://www.accountingfacts.net/articles/6372/1/American-income-tax-system/Page1.html
Jack Landry
Jack R. Landry has worked since 1988 as a tax attorney. He has written hundreds of articles about finding a Los Angeles tax attorney.
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Jack R. Landry
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By Jack Landry
Published on 02/1/2010
The American tax system is very complicated and hard for many people to understand. Taking the time to understand how our tax system functions and what some of the tax lingo means will help you avoid running into any trouble with the Internal Revenue Service.
American income tax system
The American tax system is very complicated and hard for many people to understand. Taking the time to understand how our tax system functions and what some of the tax lingo means will help you avoid running into any trouble with the Internal Revenue Service.
Income taxes are the main source of tax revenue for our government. Having a sound knowledge of how your income is taxed and where that money goes is very beneficial.
Many Americans only think of taxes and the taxing system once a year when April rolls around. The taxing process is a never ending process that can be likened to a perpetual motion machine.
We will explain the income tax system by giving you a fictional example of an average American. Let's call our American man Bobby.
When Bobby starts a new job, his tax process begins. Bobby meets with his employer and will agree on his compensation, which will be figured into his gross income at the end of the year.
His employer will provide him with tax forms to fill out before he begins to work. Included in these tax forms will be a W-4 form.
The W-4 form gives Bobby the opportunity to list all of his withholding allowance information. His withholding allowance information includes the number of dependents and Bobby's child care expenses.
The information on this page will tell your employer exactly how much money he or she needs to withhold from Bobby's paycheck for federal income tax. The Internal Revenue Service suggests that you take a look at your W-4 every year, in case your tax situation changes.
After Bobby has been hired and has a set salary, he can then estimate how much he will pay in taxes for the year by following a few simple steps. First, he will assess gross income which includes work income, interest income, pension and annuities.
Second, bobby will subtract any adjustments from his gross income. Some of these adjustments may be alimony, retirement plans, interest penalty on early withdrawal of savings, tax on self-employment, moving expenses or education loan interest payments.
The difference between Bobby's gross income and his adjustments is Bobby's adjusted gross income. This is often referred to as his AGI.
After figuring out what his AGI is, there are two different ways to proceed. He could either subtract a standard deduction or subtract itemized deductions.
When choosing between an itemized deduction or a standard deduction Bobby will go with whichever number is higher. Keeping records throughout the year so that the itemized deductions are correct is very important.
Itemized deduction can include some medical and dental expenses, charitable contributions, interest on home mortgages, state and local taxes and casualty loss. Making an itemized deductions will be harder and more work, but can be very worth it.
After Bobby has decided what form of deductions you will be deducting, you then subtract any personal exemptions. So, after taking his deductions and personal exemptions from his AGI you will finally have your taxable income.
After finding this number Bobby must then go to the IRS tax tables. The Untied States uses a marginal tax rate system.
There are six tax brackets and which bracket Bobby will fall on depends on his taxable income. The six brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent.
After looking at the tax tables Bobby will then find how his tax rate works. His tax rate depends on his income and his marital status.
After finding your gross tax liability you can then subtract any credits. Credits may include such items as child care.
Finally you will find the net tax with that difference. This number will explain how much to pay or how much of a refund to expect.
This number is a very reliable number to count on. Even after understanding how your income tax and tax return work, there are times when running into tax trouble happens.
If you have found yourself in bad standing with the Internal Revenue Service, it is important to remember that you have options. As scary as your debt can seem there are ways to get out of debt.
Working with professionals is a very good idea. A professional is trained in the ins and outs of the laws and will be much more knowledgeable than those with everyday knowledge.
Tax attorneys are great resources to turn to if you feel that you have gotten yourself in over your head with tax debt. Going to a professional and having your debt liquidated as soon as possible is crucial.
Income taxes are the main source of tax revenue for our government. Having a sound knowledge of how your income is taxed and where that money goes is very beneficial.
Many Americans only think of taxes and the taxing system once a year when April rolls around. The taxing process is a never ending process that can be likened to a perpetual motion machine.
We will explain the income tax system by giving you a fictional example of an average American. Let's call our American man Bobby.
When Bobby starts a new job, his tax process begins. Bobby meets with his employer and will agree on his compensation, which will be figured into his gross income at the end of the year.
His employer will provide him with tax forms to fill out before he begins to work. Included in these tax forms will be a W-4 form.
The W-4 form gives Bobby the opportunity to list all of his withholding allowance information. His withholding allowance information includes the number of dependents and Bobby's child care expenses.
The information on this page will tell your employer exactly how much money he or she needs to withhold from Bobby's paycheck for federal income tax. The Internal Revenue Service suggests that you take a look at your W-4 every year, in case your tax situation changes.
After Bobby has been hired and has a set salary, he can then estimate how much he will pay in taxes for the year by following a few simple steps. First, he will assess gross income which includes work income, interest income, pension and annuities.
Second, bobby will subtract any adjustments from his gross income. Some of these adjustments may be alimony, retirement plans, interest penalty on early withdrawal of savings, tax on self-employment, moving expenses or education loan interest payments.
The difference between Bobby's gross income and his adjustments is Bobby's adjusted gross income. This is often referred to as his AGI.
After figuring out what his AGI is, there are two different ways to proceed. He could either subtract a standard deduction or subtract itemized deductions.
When choosing between an itemized deduction or a standard deduction Bobby will go with whichever number is higher. Keeping records throughout the year so that the itemized deductions are correct is very important.
Itemized deduction can include some medical and dental expenses, charitable contributions, interest on home mortgages, state and local taxes and casualty loss. Making an itemized deductions will be harder and more work, but can be very worth it.
After Bobby has decided what form of deductions you will be deducting, you then subtract any personal exemptions. So, after taking his deductions and personal exemptions from his AGI you will finally have your taxable income.
After finding this number Bobby must then go to the IRS tax tables. The Untied States uses a marginal tax rate system.
There are six tax brackets and which bracket Bobby will fall on depends on his taxable income. The six brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent.
After looking at the tax tables Bobby will then find how his tax rate works. His tax rate depends on his income and his marital status.
After finding your gross tax liability you can then subtract any credits. Credits may include such items as child care.
Finally you will find the net tax with that difference. This number will explain how much to pay or how much of a refund to expect.
This number is a very reliable number to count on. Even after understanding how your income tax and tax return work, there are times when running into tax trouble happens.
If you have found yourself in bad standing with the Internal Revenue Service, it is important to remember that you have options. As scary as your debt can seem there are ways to get out of debt.
Working with professionals is a very good idea. A professional is trained in the ins and outs of the laws and will be much more knowledgeable than those with everyday knowledge.
Tax attorneys are great resources to turn to if you feel that you have gotten yourself in over your head with tax debt. Going to a professional and having your debt liquidated as soon as possible is crucial.