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Taxes . . Can’t live without them (in America). Income taxes are an integral part of American life, regardless of whether we like it or otherwise. While we grumble and groan as we fill out our tax returns each spring, our tax dollars pay for many of the things we take for granted, such as highways, schools, and national parks Maryland tax services.

You’ll likely be hearing from Uncle Sam if Uncle Sam doesn’t get his fair share of the Tax Day. We are sure you do not want this.

It doesn’t seem like income taxes will be going away anytime soon. So what are they? How do they work? And how can you find out how much of your hard-earned cash goes to the IRS each year? Let’s take a closer view.

What is an Income Tax?

An income tax is a tax that the government collects from money earned by individuals and businesses during the year. The amount of money you make in a given year will determine how much tax you pay.

The IRS collected over $1.9 trillion in individual income taxes in 2018 and $277.1 billion from businesses in income taxes in 2018. 1 This is a lot! These income taxes together make up nearly two-thirds all of Uncle Sam’s tax money each year home business for moms.

IRS collects these income taxes, and then tax dollars fund a wide range of public services, including transportation, education, military spending, and medical research. Individual income taxes have been the largest source of federal revenue since 1950.  Congress, you’re very welcome!

Where did the income tax come from?

Do you need someone to blame this year for your income tax bill? It’s kind of. Abraham Lincoln is the right person to blame for your income tax bill this year.

Although death and taxes may seem like the only certainty in life, income taxes weren’t always so. The income taxes we know today are barely more than 100 years old.

Lincoln signed the first personal income tax in the U.S. during the Civil War. This was to help the Union pay for its war efforts. The tax was eventually repealed after the war, but the debate about whether or not an income tax is constitutional has continued for decades.

All that changed in 1913. This was also when the 16th Amendment to the U.S. Constitution was approved, allowing the government to collect federal income taxes. In the same year, Congress also passed legislation making income tax an integral part of American life. As they say, the rest is history.

How does income tax work?

Let’s go back to high school civics for a moment. The U.S. tax system uses progressive – that’s fancy tax talk. It means that the higher your taxable income is, the more income taxes you will have to pay.

How are Income Taxes Collected

You’re likely to be like the majority of American employees who have a salary, benefits, and a retirement plan. Your employer will probably set aside money from your paycheck for income tax before it hits your account. These are known as tax withholdings.

Do you still have the W-4 tax form that you completed when you were first hired? Your employer uses the information on the record to determine how much to withhold each paycheck consulting firms in Baltimore.

You’ve paid your fair share of taxes to the government for the majority of the year. You can look at your last paycheck to find out how much was sent to the IRS.

You’ll be able to find out whether you owe Uncle Sam any taxes, if you have overpaid or if your tax returns are due in spring.

It sounds simple. What if you are self-employed? (Small-business owners, freelancers, and independent contractors) Your income taxes will likely be paid through quarterly taxes or estimated taxes that you file with IRS every three months. You’ll need a tax professional to help you all year if you are self-employed.

What are the Different Types Of Income Taxes?

While we’ve talked a lot lately about federal income taxes, there’s a good possibility that they aren’t your only income taxes to be concerned about.

You might be required to pay income taxes at either the corporate rate or the state level, depending on where and how you live. Some local governments even want your paycheck.

Let’s look closer at the various types of income taxes that you may encounter during tax season.

State Income Taxes

Uncle Sam doesn’t want a share of your income. Most states have their income tax system, just like the federal government. Ugh.

Where does your state’s income tax money go to? 

Each state can be classified into one of three categories:

  • States with progressive Income Tax
  • States with a Flat Income Tax
  • Conditions with no income taxes

Let’s take a look at each.

  1. States with progressive income taxes

Like the federal level, many states have a progressive structure that includes marginal tax rates. All that matters is The higher your income, the more tax you will be subject to.

Each state has its tax rates and tax brackets. If you live in one of the 32 states with a progressive tax structure, you should pay attention to your state’s tax brackets and rates.

If you live in Hawaii, you could be in one of 12 tax brackets with tax rates between 1.4% to 11%. Louisiana only has three tax brackets that have tax rates between 2 and 6 percent. It is worth considering this before you decide to move to another state. 

States with flat income taxes

Nine states keep things simple. It is straightforward. They have one flat tax rate. It doesn’t matter what income you have. You are taxed the same as everyone else.

Let’s look at Kentucky, which has a flat income tax of 5%. Kentucky will tax you both 5% if you make $50,000 and your neighbor made $500,000 last year.

These are the nine states with a flat income tax structure.

  • Colorado
  • Illinois
  • Indiana
  • Kentucky
  • Massachusetts
  • Michigan
  • North Carolina
  • Pennsylvania
  • Utah

States with no income tax

There are seven states with no income tax! This is even better! These are the seven states that have no income tax.

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Tennessee and New Hampshire are two other states that don’t tax income. However, the tax income is earned from dividends and interest from investments.

Although not having an income tax in the state is nice, conditions usually make up for any revenue lost through other taxes like property taxes or sales taxes.

Business Income Taxes

Are you a small-business owner? How your business is organized will determine how you pay taxes on profits.

Your business can now have a flat 21% income tax rate if it is a corporation (35% before that bill).

Your business profits “pass-through” to you. You would then fill out your tax returns as you would typically and pay taxes at the personal income tax rate. However, if your business is a pass-through entity, such as a sole proprietorship (LLC), or a limited liability corporation (LLC), you will not have to pay corporate income taxes.

Local Income Taxes

While most U.S. counties and cities don’t charge income taxes, nearly 5,000 jurisdictions in 17 states (especially the Northeast) still have to collect an income tax.

These local income taxes are primarily imposed by municipalities, counties, and school districts to fund various civic services such as parks, schools, and garbage collection.

Do your taxes right.

It doesn’t matter if you are a state resident with no income tax or if your tax situation is simple. Self-filing with RAM Smart Tax is easy and quick. Hidden fees won’t surprise you, and tax jargon won’t confuse you.

Find out how Smart Tax can help you file your taxes!

But, depending on your location, you may have to deal federal, state, and local taxes. . . That’s quite a bit! You don’t have to feel overwhelmed by tax season. Get help from one of our tax Endorsed Local Providers in your area. You can feel confident knowing that you have a trusted tax advisor to assist you in filing your taxes correctly.

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