An overview of what income taxation is, its importance, and the basic concepts and principles involved in the taxation of individual and business income.
Introduction to Income Taxation – Study Notes
| Aspect | Description |
|---|---|
| Definition | A levy imposed by governments on the net earnings of individuals, businesses, and other entities. |
| Purpose | - Fund public services (education, health, infrastructure). - Redistribute wealth. - Influence economic behavior (e.g., incentives, disincentives). |
| Jurisdiction | Usually administered at the national/federal level; many countries also have state, provincial, or local income taxes. |
| Term | Meaning |
|---|---|
| Gross Income | Total income before any deductions (e.g., wages, interest, dividends, rent). |
| Adjusted Gross Income (AGI) | Gross income minus specific “above‑the‑line” adjustments (e.g., contributions to retirement accounts, student loan interest). |
| Taxable Income | AGI minus standard deduction or itemized deductions and personal exemptions. |
| Tax Bracket | Range of taxable income taxed at a specific marginal rate. Most systems are progressive (higher rates for higher incomes). |
| Marginal Tax Rate | The rate applied to the next dollar of taxable income. |
| Effective Tax Rate | Total tax paid ÷ total income; reflects the average rate across all brackets. |
| Tax Credit | Dollar‑for‑dollar reduction of tax liability (e.g., child tax credit). |
| Tax Deduction | Reduces taxable income (e.g., mortgage interest, charitable contributions). |
| Withholding | Pre‑payment of tax from wages or other income, remitted to the tax authority by the payer. |
| Self‑Assessment | Taxpayers calculate and report their own tax liability (common in many jurisdictions). |
| Category | Examples |
|---|---|
| Earned Income | Salaries, wages, bonuses, commissions, tips. |
| Investment Income | Interest, dividends, capital gains, rental income, royalties. |
| Passive Income | Income from limited partnerships, trusts, or other activities where the taxpayer is not actively involved. |
| Other Income | Alimony (in some jurisdictions), unemployment benefits, gambling winnings, certain fringe benefits. |
Note: Some items may be exempt or partially exempt (e.g., certain social security benefits, municipal bond interest).
| Taxable Income | Marginal Rate |
|---|---|
| $0 – $10, |