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The Different Types of Income Tax

Income Types

There are four basic types of income. Those four types of income for any individual, or married couple, are combined in order to make determinations about tax brackets. There is earned income, which includes all profit that an individual receives from their employer as a direct result of work performed. In order to get paid by an employer, an employee must work.

There is also residual income which include items such as royalties from a book. This type of income involves an individual continuously being paid for one performance. In other words, they receive residual income based on one act of work, including the purchase of a rental property. Leveraged income in income earned in conjunction with the efforts of another individual or group of individuals.

There is also passive income which is earned after one action, without further effort from the individual. For example, stocks are passive income because it only takes on action, buying the stocks. There are many other specific types of income and most fall into the categories which vary according to individual state's tax tables.

Most people have salary income, or monies paid to then by an employer, as compensation for work performed. Some taxpayers have interest, dividend, pension and retirement plan income. There are taxpayers that have business income, rental income or farming income. Those are incomes that result in monies paid directly to individuals due to a service they provide such a growing vegetables or making furniture.

In some states, taxpayers must pay an income tax on inheritance. Most taxpayers will find that they have to pay additional income taxes based on short term capital gains. In fact, taxpayers generally pay the same percentage of income tax on their salary and capital gain, since short term gains are treated as income. Those determinations are made by examining a tax bracket, or tax table.

There are various types of income that taxpayers must include in their total income for income taxes paid to their state and the federal government. A taxpayers total income can help them determine their percentage of income tax by looking at their state's tax bracket or the federal tax table. Taxpayers must then subtract all allowable deductions in order to see what their actual income tax is based on, according to the tax table.

Individual taxpayers may find that they fall under a different tax bracket for state and federal income taxes. States make individual allowances for deductions and may not allow all Federal deductions for state income taxes. Frequently, tax payers find that their total income is different as it applies to their states tax bracket and the federal tax table. In addition, tax payers may find that their state does not classify income in the same manner that the federal government does. In fact, some states only charge income taxes on specific types of income, such as earned interest.

NEXT: The Truth About Income Tax Rates

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