A tax is a compulsory transfer of resources from private individuals or entities to the government in exchange for the benefit of public goods and services. This is the primary source of revenue for most nations, and as such, plays a key role in enabling governments to maintain infrastructure and provide welfare programs. In economics, theories of taxation explore how to maximize economic efficiency and social welfare through the levying of taxes.
A person or entity’s tax liability is the amount they are legally obligated to pay in a given year based on their individual circumstances. These circumstances include filing status, adjusted gross income, deductions and credits. A good understanding of these factors is essential for planning ahead for the annual filing season.
Income sources for determining tax liability are diverse, including wages and salaries, interest and dividends, rental income, capital gains, alimony, unemployment benefits, and the sale of personal property. Each of these sources have unique tax implications, and each requires proper documentation to accurately determine their effect on a taxpayer’s tax liability.
A person’s tax liability is determined by their taxable income, which is total earnings minus allowable deductions. The standard deduction is a flat amount that all eligible taxpayers can subtract from their taxable income, and there are several other deductions that can be taken advantage of depending on one’s filing status. In addition to taxable income, some people are subject to self-employment taxes and property taxes.
About the Author
