Income Tax: Its Origin, States Involved, and How It Works

The tax filing season has arrived. It might be your first time filing taxes for some. Tax preparation is not always a simple task, even for those who have been filing for years.

Governments impose an income tax on income generated by individuals and businesses under their control.

According to an article published by USA Today on March 02, 2023, an individual’s wages, salary, and other sources of income are subject to individual income tax. Typically, the state is the one to impose this particular tax. Depending on your circumstances, you may be able to avoid paying taxes on your income if you qualify for certain exemptions, deductions, or credits.

Corporations, small businesses, and independent contractors are all subject to business income tax. After disclosing their business income, the company, its owners, or shareholders would deduct operating and capital costs. The “taxable business income” of the company would be the difference.

Many states also impose a personal income tax on their citizens. Even so, they are not necessarily more expensive to live in than states with no income tax.

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are the eight states without an income tax. While there is no state income tax in New Hampshire, the state does impose a 5% tax on residents’ interest and dividend income.

Your filing status and your income determine the percentage of your income that is subject to tax. In other words, you pay more taxes if you earn more money.

All taxable income earned during a tax year is added to arrive at the income tax calculation. Locate your adjusted gross income next. Then, deduct from your adjusted gross income any deductible expenses that are allowed.