An individual income tax , also called a personal income
tax, is a tax on a person's income. Income includes wages, salaries,
and other earnings from one's occupation; interest earned by savings
accounts and certain types of bonds; rents (earnings from rented properties);
royalties earned on sales of patented or copyrighted items, such as
inventions and books; and dividends from stock. Income also includes
capital gains, which are profits from the sale of stock, real estate,
or other investments whose value has increased over time.
The national governments of the United States, Canada, and many other countries
require citizens to file an individual income tax return each year.
Each taxpayer must compute his or her tax liability-the amount of money
he or she owes the government. This computation involves four major
steps. (1) The taxpayer computes adjusted gross income-one's income
from all taxable sources minus certain expenses incurred in earning
that income. (2) The taxpayer converts adjusted gross income to taxable
income-the amount of income subject to tax-by subtracting various amounts
called exemptions and deductions. Some deductions exist to enhance
the fairness of the tax system. For example, the U.S. government permits
a deduction for extraordinarily high medical expenses. Other deductions
are allowed to encourage certain kinds of behavior. For example, some
governments permit deductions of charitable contributions as an incentive
for individuals to give money to worthy causes. (3) The taxpayer calculates
the amount of tax due by consulting a tax table, which shows the exact
amount of tax due for most levels of taxable income. People with very
high incomes consult a rate schedule, a list of tax rates for different
ranges of taxable income, to compute the amount of tax due. (4) The
taxpayer subtracts taxes paid during the year and any allowable tax
credits to arrive at final tax liability.
After computing the amount of tax due, the taxpayer must send this information
to the government and enclose the amount due. In 1995 the average four-person
family in the United States paid about 9.2 percent of its income in
income taxes. Many taxpayers, rather than owing money, receive a refund
from the government after filing a tax return, typically because they
had too much tax withheld from their wages and salaries during the
year. Low-income workers in the United States may also receive a refund
because of the earned income tax credit, a federal-government subsidy
for the working poor.
The Internal Revenue Service (IRS), an agency of the Department of the Treasury,
administers the federal income tax in the United States. Canada Customs
and Revenue Agency, which operates under the Minister of National Revenue,
administers the tax in Canada. See Income Tax.
