Basics of U.S Tax System Explained

We all are aware of the fact that American people started paying income tax in the year 1913. Till the period of World War II, the income taxes were paid as an approximate amount at the end of every year. At present, the people of America are paying about forty percent of their income as tax, which was only about six percent few years back. During the time of World War II, the governing body of America started to withhold a part of the tax from each and every paycheck that the people earned to stabilize the financial position of the government at that time. The U.S tax law is considered to be a complex one as it has more than seven billion words approximately.

There are some common elements of tax which need to be understood properly in order to file tax or to have a complete knowledge of the U.S tax system.

W4 Form: - This is the form which is filled when any person starts a job. To be precise W4 form is the one in which the people of America list the information related to their withholding allowances. These allowances are a mere estimation of the total amount that the person would owe at the end of a financial year. Based on these estimates the employers deduct a specific amount from the paychecks of their employees. It can be said that this is the approximate amount which one is withholding.

W2 Form: - When the tax year ends in January, the employers are asked to send a W2 form which defines that how many employees have paid their tax and how many are left. This W2 form contains all the information which is required for the purpose of filing tax. The W2 form does not include the information related to investments made, tax breaks, other taxes paid and the deductions that one has gone through.

AGI (Adjusted Gross Income):- AGI is the sum total of the earned and the unearned income from the various taxable accounts. This AGI is calculated with the various parameters such as income, capital gains from the investments, taxable pension, rental income and retirement benefit plans. The two things which are subtracted from the AGI are IRA, SEP and the alimony payments.

Deduction: - The deductions are made from various kinds of expenses such as the personal expenses and various other types of deductions. One can take the deduction in two ways namely a standard deduction and an itemized deduction. To define standard deduction, it can be said that it is the amount which the government allows to be filed at the time of filing the income tax return. If one wants to have the itemized deductions then it is required that one qualifies for them before filing the tax. Since, it is entirely upon the person who is filing the tax to choose the deduction, one needs to look after the perquisites of the deduction carefully.

If one has a complete knowledge of the above mentioned terms, filing an income tax would never be tough.

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