Income can be divided in several ways for the purpose of calculating income tax. In the United States, the way money is made and spent makes a huge difference in the tax payable to the government.
The most basic division of income is as ordinary income and capital gains. According to tax laws, ordinary income includes wages, salaries, and interest income from invested funds and dividends from stock. Capital gains, on the other hand, come from sale of property and any other long term investment. As a rule, long term capital gains get a preferential treatment in calculation of tax liability. However, short term capital gains are treated the same as ordinary income and the applicable tax rate is charged without any exception.
Tax Slabs For Different Income Group
For this year, here is a example on how to calculate income tax.
- 10% tax is charged for people earning less than $8,375 per year
- 15% for an earning ranging from $8,376 to $34,000 per year
- 25% for an earning ranging from $34,001 to $82,400 per year
- 28% for an earning ranging from $82,401 to 171,850 per year
- 33% for an earning ranging from $171,851 to $373,650 per year and a maximum of 35% for an earning greater than $373,651 per year.
Please note that the tax slabs mentioned above are for single people only and the slabs are different for married people filing jointly, filing separately and the head of household.
Tax Rates For Different Types Of Income
Similarly, the tax rates are different for different types of income. As per tax laws, the various types of income are as follows:
● Ordinary income – The income tax charged ranges from 10% to 35%
● Long term capital gain – The income tax charged ranges from 0% to 15%
● Short term capital gain – The income tax charged ranges from 10% to 35%
● Long term gain on real estate – The income tax charged ranges from 10% to 25%
● Long term gain on collectibles – The income tax charged ranges from 10% to 28%
● Long term gain on certain small business stock – The income tax charged ranges from 10% to 28%
The best part is that capital gains of up to $250,000 are exempt if earned from sale of real estate that is primarily used as residence.
According to tax laws, it is mandatory to file income tax returns by April 15th. IRS allows people who earn less than $56,000 to file electronically without any charges to significantly reduce pressure on post offices. Last year about 57% people filed their taxes electronically.