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What is income tax? What to know about how it works, different types and more
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Date:2025-04-18 07:55:16
Filing taxes can get confusing, especially with all the forms and applications. Whether you file with help from a professional or on your own, calculating the precise total you owe to Internal Revenue Service (and vice versa) may take some time.
You may not even fully understand what is being taken out of your pay and why. And this is something that varies depending on where you live and work.
Here's a primer on income tax: what it is, how it works, how to calculate it and which states don't have it.
What is income tax?
Income tax is a tax that governments put on income created by people and businesses within their jurisdiction.
There is federal as well as state income tax. However, not all states have income tax. In the jurisdictions that do, taxpayers must file income tax returns each year to see what they are accountable for.
The purpose of income tax is to pay for public services and government obligations and toprovide goods for the public. For example, personal income taxes help fund Social Security, schools and roads.
Types of income tax
Individual income tax, also called personal income tax, is placed on a person's wages, salary and other forms of income. This particular tax is generally imposed by the state. Depending on your situation, there are certain exemptions, deductions or credits that could make you eligible to not pay taxes on your income.
Business income tax is applied to corporations, small businesses and self-employed people. The company, its owners or shareholders disclose their business income and then subtract operating and capital expenses. The difference the company's taxable business income.
Which states have no income tax?
There are eight states that do not have an income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire has no state tax on income, but it does make residents pay a 5% tax on income earned from interest and dividends.
Does yours make the list?These 8 states don’t have an income tax.
What percent of my income is taxed?
The percentage of your income that is taxed depends on your specific situation: how much you make and your filing status. In short, the more income you earn, the more taxes you pay.
How to calculate income tax?
To calculate income tax, you add all forms of taxable income earned in a tax year. Next, find your adjusted gross income. Then, subtract any eligible deductions from your adjusted gross income.
More of your 2024 tax season questions answered
- IRS announces new tax brackets for 2024. What does that mean for you?
- We'll help you decide: Is it better to pay someone to do your taxes or do them yourself?
- Mark your calendars: Tax deadlines to keep in mind with Tax Day coming up
- Where's my refund? How to track your tax refund through the IRS system
- When can you file taxes this year? Here's when the 2024 tax season opens.
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