6/23/2017

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Income Tax

What is the difference between ordinary income and capital gains and what are tax brackets?

Question: What is an income tax?

Answer: An income tax is a levy imposed by federal, state, and local governments on the annual taxable income of individuals, estates, corporations, the self employed, large and small companies, trusts, and other entities and collected by the Internal Revenue Service and other state and local agencies.

Question: What is the difference between ordinary income and capital gains income?

Answer: Ordinary income is derived from wages and salaries while capital gains usually come from the sale of investment properties.

  • Short term capital gains from the sale of property in which the funds are held for less than a year are taxed as ordinary income.

Question: What are income tax brackets?

Answer: For taxation purposes, income taxes are paid at a given amount within a given income range. Within each tax bracket, an income dollar amount is taxed depending on the filing status of the taxpayer, such as whether the taxpayer is single, married filing jointly or separately, and/or as the head of household.

Each income tax bracket is given a marginal tax rate percentage figure. A taxpayer may fall in either the 10%, 15%, 25%, 28%, 33%, 35% or higher tax brackets.

Question: Are all incomes taxed the same?

Answer: All incomes are not taxed the same because various taxation systems exist. Taxation can be implemented in any one of several ways. The rates of taxation on different types of income may vary and some types of income may not be taxed at all.

There are progressive, regressive, or proportional income taxation rates. The United States uses a progressive tax rate system that reduces the tax liability on the poor and increases it disproportionately on those with high or rising incomes.

  1. Progressive tax is based on the premise that the amount of taxes paid coincides with the increase in the amount in which the rate applied increases, from low to high.
  2. Regressive tax is just the opposite of progressive tax, where as the tax rate decreases as the rate on which it is applied increases.
  3. Proportional tax is fixed as to the amount to of which the rate is applied, neither going up or down.

Question: What are income tax deductions?

Answer: Deductions on tax preparation forms are expenses or costs that were incurred by the taxpayer during the filing year that can be used as a means to lower taxable income liabilities. For instance, mortgage interest, charitable contributions, and certain business operating expenses are deductible.

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