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What are the Different Income Tax Regulations?

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  • Written By: Adam Hill
  • Edited By: Bronwyn Harris
  • Last Modified Date: 09 October 2018
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In most places in today's world, the laws and regulations that govern taxation are lengthy and complex, and detailing them all would be impossible. However, as complicated as income tax regulations are, the basic ideas behind them can be simple and easy to explain. In general, a person's gross income, as defined for tax purposes, is represented by all of that person's income from any source, except from those sources that are exempt from taxes. This amount, in most countries, is taxed on a graduated or "progressive" scale, where the higher the person's income, the more he will pay in taxes, both as a percentage and as a numerical amount.

Different types of income are taxed in different ways. For instance, the income tax regulations for ordinary income, like wages, are more complex than are the laws regarding capital gains income. Self-employed individuals also pay taxes differently than wage earners or salaried employees.

Income tax regulations in the United States dictate that most wage earners have some of their income taxes deducted from their paychecks. This functions as a way to incrementally prepay one's income taxes, perhaps in order to make sure that no matter what else happens with a person's finances, their income taxes will be paid. Income taxes are not the only taxes levied on wages earned, but they represent the largest portion of them.

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If a person earns income from capital gains, his taxes will depend on how long his investments were held for. Income tax regulations impose a heavier tax on capital gains from investments that were held for less than one year, as opposed to those that were held for more than one year. The tax laws are written this way in order to discourage short-term speculation in the financial markets, which in large amounts could lead to excess price volatility, a potentially troublesome condition for the markets.

Individuals who are self-employed, rather than employees, file different tax forms from employees. Income tax regulations are fairly similar for self-employed individuals, at least in terms of tax rates on their gross income. Unlike employees, they do not have any taxes deducted from their pay, and therefore usually have a net tax liability at the end of a tax year. They are, however, able to exempt portions of their income from taxes by writing off things that they need to purchase or use for their work, including office supplies, utilities like electricity and internet access, and automobile usage that relates to their jobs.

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