PF: Calculating Income Tax

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What is income tax?

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A tax imposed by the government on individuals' earnings, including wages, salaries, and tips.

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What is a progressive tax?

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A tax system where the tax rate increases as the taxable amount increases, meaning higher earners pay a higher percentage.

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What is the effective tax rate?

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The average rate at which an individual or corporation is taxed, calculated by dividing total tax paid by total income.

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What is a marginal tax rate?

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The rate of tax applied to the last dollar of income earned, which can change as income increases.

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What does FICA stand for?

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Federal Insurance Contributions Act, which mandates a payroll tax to fund Social Security and Medicare.

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What is the purpose of FICA withholding?

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To collect funds for Social Security and Medicare programs from employees' wages.

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How do you calculate the effective tax rate?

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Effective Tax Rate = (Total Tax Paid / Total Income) x 100.

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What is the difference between federal income tax and state income tax?

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Federal income tax is imposed by the national government, while state income tax is imposed by individual states.

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What are tax deductions?

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Expenses that can be subtracted from gross income to reduce taxable income.

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What are tax credits?

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Amounts that can be subtracted directly from the tax owed, reducing the total tax liability.