What is Income?
For employed individuals, salary or wages earned on regular basis is known as the primary source of income. In business, the revenue generated from the basic business after paying all expenses and taxes is known as income.
Overall, income is nothing but anyone’s earning during a period of time. According to the income tax department, there are two types of income, taxable income, and non-taxable income.
What are The Different Types of Income?
The United States of America is a super-power country that generates millions of job opportunities every year. It is also very diverse in many aspects.
The same goes with the types of jobs, businesses as well as types of income. From an income tax perspective, there are 5 heads of income.:
- Salary head
- House property
- Profit and gains of profession and business (PGPB)
- Capital gains
- Other sources
In generalized format, these are the types/heads of income sources. People acquire their living sources from these major factors.
The first head of Income Tax heads is income from salary which includes clause essentials like fully understanding any remuneration, which is collected by an individual in terms of services provided by him to the organization based on a contract of employment.
The second head among the Income Tax heads is Income from house property. According to the Income Tax Act 1961, Sections 22 to 27 are dedicated to the provisions for the calculation of the total principal income of a person from the house property or land that he owns.
The third head of Income Tax heads is Income from Profits of Business in which the calculation of the total income will be determined from the income earned from the profits of business or profession.
Capital Gains are the profits or gains earned by the holder by selling or transferring any capital assets, which were held as an investment. Any property, which is held by the holder for business or profession, is called capital gains.
Any other form of income, which is not enlisted in the above-mentioned heads, can be sorted in this category. Interest income that is earned from bank deposits, lottery awards, card games, gambling, or other sports awards is included in this category.
What is Income Tax?
As the name suggests, it is the tax imposed by the government of the country or the state on an individual or multiple entities that varies with their respective income. Income taxes are the primary source of revenue for the government, which is used to provide goods for the citizens, fund public services, pay government obligations, and much more.
Income Tax in The US
Income taxes in the United States are followed up by the federal, state, and various local governments. The income taxes are calculated by applying the tax rate, which might increase as income increases, to taxable income, which results in the total income less allowable deductions.
Individuals, corporations, many organizations, and companies are directly taxable, and estates and trusts may be taxable on a singular type of income. Partnerships are not on the map for being taxed, but their partners are taxed on their part or shares of partnership income.
Residents and citizens are taxed on worldwide income, while non-residents are taxed only on income within the jurisdiction. Various types of credits reduce tax, and few of them may exceed tax before credits.
An alternative tax applies at the federal and some state levels. Federal income taxes on individual income in the United States raised over $1.5 trillion in revenue in 2015. This represents just under half of all tax revenue collected by the federal government.
Returns to saving and working are affected by income taxes and understanding the responses of individuals to them is crucial to evaluating their welfare and revenue consequences.
Types of Income Tax That People Pay
There are two main categories of taxes that people of the country need to pay, which are further sub-divided into other parts. The two prime categories are direct tax and indirect tax. There are many other minor taxes that come into different sub-categories.
1. Direct Tax
Direct tax is a tax that is to be paid directly to the government by the individual or legal organization/company. Direct taxes are looked after by the Central Board of Direct Taxes (CBDT). Direct taxes can’t be transferred to any other individual, organization, company, or legal entity.
2. Indirect Tax
Taxes that are based on services and products are called indirect taxes. Indirect taxes are collected by the provider of the service or product. The tax is calculated along with the price of the products and services. It leads to an increase in the price of the product or service. There is only one indirect tax that is handled by the government currently. This is known as GST or the Goods and Services Tax.
3. Other Taxes
Other taxes are minor revenue generators and are small taxes. The various sub-categories of other taxes include property tax, professional tax, entertainment tax, road tax, toll tax, transfer tax, etc.
The Necessity of Income Tax
Nevertheless, the people of the country should be obliged to pay taxes to the government for several reasons. They should accept the fact that the taxes they pay provide the government a big hand of support to offer them the public services back to them all over the country.
These public services might vary from the construction of roads, bridges, public hospitals, parks, and other public services. The same tax money helps the country’s economy to be balanced and develop even more. With the help of taxes, the government can pay off its debts. In short, tax money is a way of ensuring that people have comfortable livelihoods.