A personal income tax is a tax levied by a government on the income of individuals. It is a direct tax, meaning that the tax is levied on the individual rather than on their property. The amount of personal income tax that an individual pays depends on their taxable income. Taxable income is calculated by subtracting allowable deductions from total gross income.
The Personal Income Tax Division of the Internal Revenue Service (IRS) is responsible for collecting federal personal income taxes. Most states also impose a personal income tax, and some local governments do.
A few different types of income are not included in the personal income calculation. These include government benefits, certain types of investment income, and money earned from some types of businesses.
There are several reasons why personal income tax is important:
Several benefits can reduce your personal income tax liability. One of the most common is medical insurance premiums. If you pay for health insurance, the cost of your premiums can be deducted from your taxable income.
Another common deduction is contributions to a retirement account. If you contribute to a 401(k) or similar retirement account, the amount you contribute can be deducted from your taxable income. This can help lower your tax bill in the current year and in future years when you retire and withdraw money from the account.