Income Tax

Loading the player...

What is an 'Income Tax'

An income tax is a tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public.

BREAKING DOWN 'Income Tax'

Most countries employ a progressive income tax system in which higher income earners pay a higher tax rate compared to their lower earning counterparts.

The first income tax imposed in America was during the War of 1812. Its original purpose was to fund the repayment of a $100 million debt that was incurred through war-related expenses. After the war, the tax was repealed, but income tax became permanent during the early 20th century.

RELATED TERMS
  1. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  2. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  3. Taxes

    An involuntary fee levied on corporations or individuals that ...
  4. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  5. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  6. Net Of Tax

    An accounting figure that has been adjusted for the effects of ...
Related Articles
  1. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  2. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
  3. Personal Finance

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  4. Savings

    Explaining Tax Returns

    A tax return is the form or forms used to file income taxes with the IRS.
  5. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  6. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  7. Economics

    Calculating Net of Tax

    Net of tax is a figure that has been adjusted for taxes.
  8. Taxes

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  9. Taxes

    Has Income Tax Become A Class Tax On The Poor?

    With more than 33% of American families falling close to the poverty line despite their adult members holding full-time employment, a rising number of citizens are being forced to pay a rate ...
  10. Taxes

    How Getting A Raise Affects Your Taxes

    Many people think they may actually make less overall because they are paying more taxes.
RELATED FAQS
  1. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
  2. Who first came up with the idea of a progressive tax?

    Learn how the progressive income tax system developed in the United States and became the federal government's primary revenue ... Read Answer >>
  3. Do I need to file an income tax return every year?

    Understand if a person needs to file a tax return every year. Learn the benefits of filing a yearly income tax return even ... Read Answer >>
  4. How are effective tax rates calculated from income statements?

    Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >>
  5. What is the difference between a regressive tax versus a progressive tax?

    Determine how progressive and regressive taxes impact your personal finances, and learn more about how you pay both types ... Read Answer >>
  6. What's the difference between the marginal tax rate system and a flat tax?

    Find out about the difference between marginal tax rates and flat taxes. Gain insights on both systems and the arguments ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center