Demystifying Income Tax: What Gets Taxed and Why

Understanding the basics of income taxes can make your life a lot smoother. Let’s break down what gets taxed, why it’s taxed, and how the system is designed to work for you and the government.

According to the IRS, income taxes in the U.S. are collected on a “pay-as-you-earn” basis. This means employers withhold a portion of your paycheck and send it directly to the IRS. By the end of the year, the total amount withheld should be close to your total tax liability.

• Why Withholding is a Win-Win

Withholding benefits both taxpayers and the government. For taxpayers, it eliminates the stress of saving up for a large tax payment. For the government, it ensures a steady stream of revenue to fund essential services.

• Equity as a Principle in Taxation

Income taxes are built around two key principles: vertical equity and horizontal equity. Vertical equity means that people with different incomes should pay different amounts of tax. Generally, higher earners pay a higher percentage of their income in taxes. Horizontal equity means that people with similar incomes should pay similar amounts in taxes.

• Why Similar Incomes Can Mean Different Taxes

Even if two families or businesses have the same income, their tax preparation services in Maryland might differ. This variation is due to tax deductions, exemptions, and credits, which the government uses to promote certain behaviors and spending patterns.

• The Role of Special Tax Treatments

Two taxpayers with identical incomes might owe different amounts due to their unique deductions and credits. Special tax treatments aim to support activities and lifestyles deemed beneficial by the government. For example, charitable donations can be deducted from taxable income or via a fast tax refund in Maryland, encouraging philanthropy.

• Factors Affecting Tax Liability

Several factors influence your tax liability, such as the number of dependents you have. More dependents generally mean more exemptions, reducing your taxable income. Other factors include your filing status, eligible deductions, and any tax credits you qualify for.

Baltimore Tax & Accounting Services, LLC helps individuals and businesses make sense of their tax obligations. Our tax planning services ensure you maximize your deductions and minimize your tax liability.

Our tax services in Randallstown, Maryland are here to provide sound financial planning and strategy. Contact us.