Federal Income Tax

Definition: Federal Income Tax

Federal Income Tax is a tax laid by internal revenue services on corporations, individual’s taxpayer, trusts and legal entities in the USA. It applies on all forms of income such as capital gains and salary. Individuals and corporations are taxed on overall income whereas trusts and estates are taxed on income which was not distributed. In USA Tax is applied on income at state, federal and local Government level.

The Tax rate is increased when the overall income increases because they will now come under higher slab. Taxable income is difference between total income and deductions. Individual’s tax rate are adjusted for CPI inflation and published as tax rate schedule individually.

The different tax schedules of 2016 are as follows:

Example

An individual has 50,000 Gross Income.

Standard Deduction: 6,500/-

Personal exemptions :4,500

Taxable income = 50,000-6,500-4500 = 39,000.

Tax = (10%*9275) + (15 %* (37650-9275) + (25 %*( 39000-37650)

= 927.5+ 4256.25+337.5

=5521.25

A standard deduction is a flat amount deducted by an individual for their own personal expenses. A US residence is a must for standard deductions. The Personal Exemptions is also an flat amount which is exempted according to the number of children and other dependants. These both are inflation adjusted amount and are reviewed yearly.

Hence, this concludes the definition of Federal Income Tax along with its overview.

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