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Tax season

What is income tax? What to know about how it works, different types and more

Olivia Munson
USA TODAY

Tax season is upon us. For some, it may be your first time filing taxes. And even for those who have filed for years, taxes are not always the easiest task to tackle. 

Here's what you should know about income tax, what it is, how it works, how to calculate it and which states don't have it. 

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What is income tax?

Income tax is a tax that governments put on income created by people and businesses within their jurisdiction.

There is federal as well as state income tax. However, not all states have income tax. In the jurisdictions that do, taxpayers must file income tax returns each year to see what they are accountable for. 

The purpose of income tax is to pay for public services and government obligations and to provide goods for the public. For example, personal income taxes help fund Social Security, schools and roads. 

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What is FICA?How much you contribute to federal payroll taxes.

Types of income tax 

Individual income tax, also called personal income tax, is placed on a person's wages, salary and other forms of income. This particular tax is generally imposed by the state. Depending on your situation, there are certain exemptions, deductions or credits that could make you eligible to not pay taxes on your income.  

Business income tax is applied to corporations, small businesses and self-employed people. The company, its owners or shareholders disclose their business income and then subtract operating and capital expenses. The difference  is the company's taxable business income.

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Tax season 2023

Which states have no income tax? 

There are eight states that do not have an income tax: 

  • Alaska
  • Florida 
  • Nevada 
  • South Dakota
  • Tennessee
  • Texas
  • Washington 
  • Wyoming 

New Hampshire has no state tax on income, but it does make residents pay a 5% tax on income earned from interest and dividends. 

These 9 states don’t have an income tax. Does yours make the list?

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What percent of my income is taxed? 

The percentage of your income that is taxed depends on your specific situation: how much you make and your filing status. In short, the more income you earn, the more taxes you pay. 

Earned Income Tax Credit (EITC) qualifications 

Having a child could make you eligible for the Earned Income Tax Credit. If you have one child and your adjusted gross income was $43,492 if you're filing a return alone, or $49,622 if you're filing a joint return with a spouse, you could claim up to $3,733 in a refundable tax credit. This means that even if you don't owe any taxes for 2022, you could receive $3,733.

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How to calculate income tax?

To calculate income tax, you add all forms of taxable income earned in a tax year. Next, find your adjusted gross income. Then, subtract any eligible deductions from your adjusted gross income. 

More of your 2022 tax season questions answered

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