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How to calculate tax
How to calculate tax


tax definition

Tax is defined as the sums of money that are paid to governments based on the amount of income and the financial cost resulting from it, where taxes are defined as fees returns imposed on companies and individuals when providing services or goods, and are submitted to the government agencies, whether local, regional or national; In order to contribute to the financing of government activities, the tax is one of the most important sources of government revenue and is mandatory for everyone without exception, as it is paid without being a substitute for something, and this is what distinguishes it from other sources of government income, and the method of calculating the tax will be explained in detail.

Tax Genesis

Before clarifying the method of calculating the tax, it should be known that tax patterns differ depending on the tax policy, as they affect the process of choosing and structuring tax codes since the tax imposed on imported products is easier than domestic production, and similarly, the simple sales tax that is imposed on total sales has been prevalent since long before the invention of the more economical but more administratively demanding value-added tax that allows a credit for tax paid on purchases.

Although the tax has a long history, it played a relatively minor role in the ancient world, where the tax was imposed on consumption in Greece and Rome and taxes on imported goods were often of much greater importance than internal taxes, and the tax was considered as a way to raise additional money in In wartime, for a long time these taxes were confined to real property, but later they were extended to other assets, in Greece free citizens had different tax obligations than slaves.

In the Middle Ages many of these ancient taxes, especially direct taxes, gave way to a variety of obligatory services and a system of aid, most of which were gifts. Including the entire population: Consumers and retailers were supposed to bear the burden of taxes on certain foods and drinks. During the late Middle Ages, some German and Italian cities levied several direct taxes: chief taxes on the poor, net worth taxes, and sometimes raw income taxes for the rich.

Wars affected taxes much more than taxes did revolutions. Many taxes began, notably the income tax first introduced in Great Britain in 1799 and the turnover or purchase tax in Germany 1918; Great Britain 1940 as “temporary” war measures, similarly the method of withholding income tax collection began as a wartime innovation in France, the United States, and Britain and the Second World War transformed the income taxes of many countries from upper-class taxes to a collective tax, it need not be mentioned the role that Tax policies play in peacetime politics, where the influence of powerful and well-organized lobbies is well established, and the arguments for tax reform, especially in the field of income taxation, are a constant subject of debate in the domestic politics of many countries.

Tax objectives

During the nineteenth century, the prevailing idea was that taxes should serve mainly to finance the government, but governments used taxes for non-financial purposes only. One useful goal of taxation is to distinguish between the objectives of resource allocation, income redistribution, and economic stability. Economic growth is sometimes included or development and international competitiveness as two separate objectives but can generally be included under the following three objectives:
  • The first objective: the allocation of resources and is reinforced if the tax policy does not overlap with the allocations specified in the market.
  • The second objective is: Redistribution of income and aims to reduce inequality in the distribution of income and wealth.
  • Third Objective: The stabilization objective that is implemented through tax policy, government spending policy, monetary policy, and debt management is to maintain high employment and price stability.

Income exempt from tax

The Internal Revenue Service defines income as any money, property or services received, but there are exceptions for both individuals and companies, and these exceptions come into effect when certain circumstances arise. It is important to know these exceptions in order to know how to calculate the tax when starting the planning and investment process The most important types of income that are exempt from tax are:
  • Disability insurance payments.
  • Employer insurance.
  • Health savings accounts.
  • Life insurance payments.
  • Selling the main residence.
  • Gifts of up to $15,000 and gift receipts.
  • Tuition fees or medical expenses paid on behalf of another person.
  • political donations.
  • inheritance.
  • Municipal Bond Department.
  • retirement income.

How to calculate tax

Individuals earn income-earning wages by working or making investments in financial assets such as stocks, bonds, and real estate. For example, a holding of an investor's stock may pay income in the form of an annual dividend of 5%. In most countries, the income earned is subject to tax by the government before receiving it, so it is necessary to know the method of calculating the tax, as follows:

net tax calculation

Net tax is the initial or aggregate results of a transaction or group of transactions minus the relevant income taxes, the term is commonly associated with the results of an entire business where its profits or losses are described as net of tax if the effects of income taxes on profits or losses are accounted for, and if no Income taxes are included in the profit or loss account, then the profit or loss is before tax, and to find out how the tax is calculated, for example, if a company has a large net operating loss carried, there will be no tax to compensate for the income, because the interim loss compensates the tax, in this In the case, the net tax profit number will be the same as the pre-tax profit number.

Example of a net tax calculation method: When ABC reports a pre-tax profit of $1,000,000 and after subtracting the relevant income tax of $350,000, ABC reports a net taxable income of $650,000.

Income Tax Calculation

Income tax payable is a liability of the enterprise and is based on the level of reported profitability, where the tax can be paid to a variety of governments, and once the organization pays the income tax, the obligation is canceled, and an alternative to payment can be resorted to by reducing the income tax liability through the application of the tax credit granted By the applicable government entity since the tax credit usually expires after a period of time so one must pay close attention to any of them.

The amount of income tax due does not necessarily depend on the accounting profit reported by the company, there may be a number of adjustments allowed by the government that change the accounting profit to lead to a taxable profit, and to know the method of calculating the tax then the income tax rate is applied to it can be These adjustments result in timing differences between accounting earnings recognition and tax reporting which in turn can create differences in the amount of income tax due is calculated on the tax return and income tax expense reported in the company's income.

Example: If ABC International has $100,000 in pre-tax earnings and the federal government levies a 20% income tax, ABC must record a debit to the $20,000 income tax expense account and a balance to an income tax receivable account of $20,000. ABC pays the tax later deducts the $20,000 income tax owed account and credits the $20,000 cash account.
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