Tax Basics And The Purpose It Serves

In order to get brief information on tax, you should know from where the word ‘tax’ has originated. It has originated from a Latin word ‘Taxare’ that means ‘to estimate’. Tax can be defined as the charge made by the government on all sorts of income (such as, goods, medicine, traveling, etc.) and the accumulated money is used for various purposes. Federal government of United States imposes a levy on taxable income of individuals, corporations, companies, trusts, etc. It means that individuals as well as corporations need to give certain tax to the Government on the basis of their income.

What constitutes 4 R’s

There are 4 purposes of tax, which are known as 4 R’s of tax. They are described below.

1. Redistribution: It means transfer of wealth from the richer sections to the poorer sections of a society. 2. Revenue: The amount collected as tax is used for various developments, (such as, for schools, hospitals, roads, etc.). It is also used for legal systems and market regulation. 3. Representation: Another purpose of taxation is to demand accountability from Government. 4. Repricing: Sometimes, tax is collected to discourage certain habits and practices; as for example, tobacco is taxed to discourage the habit of smoking.

Concepts in reference to tax

If you want to gather brief information on tax, then you should know certain concepts, which are discussed in the following lines.

• Tax rate – It refers to the rate at which a person or a business is taxed on a specific income. It also refers to the rate of tax on goods and services. There are 3 major types of tax rates, namely, proportional tax rate, progressive tax rate and regressive tax rate.

• Tax bracket – Tax brackets are set on the basis of an entity’s income levels; higher the income, greater is the tax bracket. It serves as a cut off for a given income tax rate.

• Tax return – As the name suggests, tax return refers to the return of excess taxes that is paid in a given tax year. It is also known as tax refund. An entity receives tax refund when it files a tax return.

• Tax liability – It can be defined as a legal claim on particular assets. In other words, tax liability is the total tax amount which an entity is lawfully obligated to give to an authority; it is paid by an entity as a result of a taxable event.

• Tax shelter – Tax shelter is a legal method of minimizing the taxable income of an investor. Thus, it can be said that tax shelter reduces an entity’s tax liability. An example of one of the most common types of tax shelter is employer-sponsored 401(k) plan.

You can reduce the amount of tax you owe through an effective tax planning. If you wish, you can take help of a tax consultant to get brief information on tax planning; he/she can also help suggest you ways to reduce the amount of tax you owe.

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