What is a Federal Income Tax?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 18 February 2020
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Federal income tax is a tax on various forms of income, including income from work and investments, assessed by the federal government in a nation where a person lives or works. Tax law is quite variable worldwide. Not all federal governments charge income tax, and the policies relating to taxation can change from place to place, depending on a taxpayer's status and other issues. Generally speaking, in nations where taxes are levied, failure to pay tax can result in legal, as well as fiscal, penalties such as jail time and fines.

In order to determine the amount they owe, taxpayers usually file documentation showing their sources of income in a given year. This documentation also includes allowances for expenses considered tax deductible in the nation where the person is filing. This can include medical expenses, work-related costs, education expenses, and so forth. People are allowed to deduct expenses to reduce their overall federal income tax liability.


Systems for filing federal income tax statements vary. In some regions, people file paper or electronic forms and these are compared with government records to confirm they are correct. In other nations, people may be sent a tax bill based on information collected by the government, and they are given an opportunity to appeal the bill if they feel it is incorrect. In all cases, the complexity of tax issues increases for people who own businesses or work as independent contractors, as well as for people who own property, participate in investments, and have children.

In a nation with a flat tax, everyone pays the same percentage of income in the form of taxes. Most nations have a progressive tax, however, where people pay more in federal income tax as they earn more. Progressive taxes are capped at a certain percentage. Taxpayers are placed into tiers, known as brackets, based on income and the current cost of living in a given nation. Deductions can be used to push a taxpayer into a lower tax bracket.

Nations use the federal income tax monies they collect to fund a wide variety of activities including welfare services, public works programs, military activities, and so forth. Governments are expected to be accountable to their citizens when it comes to use of tax dollars and allocation of funding typically takes place in the legislature. Members of the legislature debate how money should be used and may promote projects requiring the use of government revenues.



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