A mandatory financial charge levied on an individual or organization by a government to fund various public expenditure programs. Taxes are generally collected to fund infrastructure improvements, national defense, welfare programs and more. Failure to pay taxes can lead to serious consequences under pre-defined laws.
There are three basic types of taxes—taxes on what you earn, taxes on what you buy and taxes on what you own. The first two are usually based on percentages of the sale value (ad valorem–sales taxes), while the last ones can be based on either a set amount per unit or physical quantity (per cent of the price, called excise taxes).
The core purpose of taxation is revenue mobilization, providing resources for National Budgets and forming an important part of macroeconomic management. Taxation also provides incentives for economic efficiency, wealth redistribution and economic stability.
Income tax is the main source of taxation for most governments. The amount of income subject to taxation depends on the country and its tax system, ranging from simple flat rates for all personal incomes to progressive ones based on ability to pay. Individuals have a variety of personal allowances and deductions that can be applied to their taxable income to reduce their tax liabilities.
The standard IRS form for filing personal income taxes is Form 1040, which compiles all sources of income, deductions and credits to determine a preliminary tax liability. From there, a taxpayer can subtract all nonrefundable credits to find his or her total tax liability. Alternatively, taxpayers can file electronic returns with the IRS through an online service.