Income Tax Law
New Tax Laws you should be aware of
What is meant by federal tax? Basically federal tax covers a burden or a fixed amount set by the state or the government upon individuals, corporations and families as a monthly or yearly charge that these people have to pay to the government. But why does the federal government charge this amount to the people? The government also needs money to create buildings other welfare facilities for the people of its country and they can only do so if the money is circulated and regulated in a proper way. This is a complete cycle, since an individual earns money from the government and in the form of any income. A portion or a particular part from that money goes back to the government in the form of taxes and the government then utilizes that amount to provide its people with more welfare services and facilities.
There is strict code of conduct that the government has to follow in terms of charging a specific amount for tax for specific people and not over charging or under charging them. The best way to tax the whole population fairly is to follow a progressive taxation policy, in which a certain level of income earners have to pay back a certain amount, and this level of tax increases as the income increases. Also, there are other regulations that make up taxation, and the government levies them on the people and economic transactions. This is called tax law. To understand better what tax law is you should first know what types of taxes there are. The three main types of tax classifications are:
- Progressive tax
- Regressive tax
- Proportional tax
A proportional tax is a tax that is fixed for all income households. It doesn’t depend if the income level is high or low, the tax that is charged is the same amount. The second type of tax is the progressive tax system is system by which the amount of tax increases with the level of income. The third type of tax is the regressive tax system in which the amount of tax charged decreases as the income level increases. You must be wondering what type of government’s would do this as this seems very unfair when keeping in mind income levels. A regressive tax system is most suitable for retail commodities and excise taxes charged on the import and export of goods. There are further two classifications of taxes:
- Direct tax
- Indirect tax
Direct taxes are those taxes that are levied by the government directly on the income level. The types of direct income taxes are federal income tax, capital tax; value added tax, corporate taxes and wealth tax. Such taxes are directly applied to the wealth and income earned by the individual. By tax law, progressive taxation is charged for incomes and a proportional tax system, which is a fixed amount, is charged to corporations and companies. The second type of tax which is the indirect tax is charged without any notification to the payee and is usually charged for such consumption. The different types of indirect taxes are sales tax, excise tax and custom duties. The indirect taxes are usually applied to commodities and objects that are imported and exported. There are further different types of customs, sales tax and excise duties, which will be discussed now.
Customs by tax law are duties that are charged by the nation to imports and exports. The customs on imports are higher. Why? This is because if foreign products make up the local industry, then the local products will not be able to survive. Hence, these duties are present as a type of a protection against formation of foreign policies. The trend of these customs charged is showing a downward trend, once it used to generate a main portion of the revenue, but now generates the least portion. These customs are maintained and overlooked by the regional states.
The sales tax is perhaps the largest contributor to the revenue of a state. This tax is usually charged on the sale and supply of goods. This tax is both obtained by the seller and the purchaser. Sales tax has greatly increased from over the years and is applied to every single commodity. The typical rate for this tax is 15%, however, each country can set its own limit according to the requirement of revenue generation.
This tax is usually collected at the manufacturing stage and is charged to manufacturers of products. This tax is also been showing a downward trend. However, now excise duty is now being placed by the sales tax.
Paying taxes according to law is very important, however, many people are trying to escape or lessen the total amount that they need to pay to the government. What they do not think of is the long term effect of this fraudulent activity. Escaping or showing lesser money on your balance sheet is known as tax evasion and tax fraud and is considered to be a serious offense by tax law. People try to misrepresent and conceal their true state of income that has been earned. In other instances they try to conceal the profits they have actually earned and even overstate the federal tax deductions. What are federal tax deductions? These are items that have been declared by the law as being non-taxable. They also include the expenses that have been incurred by the person to generate income, such expenses are not taxable. The items that are not taxable by the government include:
- The cost of goods sold – all the materials that have been put into production to generate the final goods aren’t taxable.
- Expenses incurred by the business for trading and other purposes.
- Losses incurred by the person
- Personal deductions as a result of expenses
However, this doesn’t mean that these businesses show an increased list of such expenses to decrease the amount of taxes that have to be paid. These are known as limits on these federal tax deductions and include items such as:
- Use of automobiles
- Compensation of employees and certain employers
- Entertainment related to business
- Lobbying in front of the government
These limits are set to avoid fraudulent activity by the tax payers. Taxpaying is the most important duty of any individual of an economy. People usually think of paying tax as an unwanted expense set by the government to over burden them. However, this isn’t what is right. Without taxes, the government cannot provide its people with the facilities that are necessary.