First let’s talk basics
What is income tax? It’s an amount an individual has to pay which is calculated as a percentage against the income made by that person. Income tax is payable only after a substantial amount of income is made and the threshold is subjective to the country, for example a Canadian citizen is payable for income tax only after $10,000 or more is earned as an annual income. It is very important to file for taxes especially for low-income citizens so that they can take advantage of the government benefits that come with it. Tax payable can be easily reduced by claiming tax credits and other benefits can be claimed while filing for the taxes so that the eligibility is recognized by the government.
What is subjective to income tax?
Any kind of official full-time job or part-time job, income generated from rental services, sales business, or investment business such as dividend received and even receiving a pension is subjective to income tax. Money received as a gift or lottery, the property received as an inheritance or any kind of gain earned without any service provided or investment made is not subjective to income tax.
What are the benefits of filing for income tax?
Income tax filing has various benefits including ease while loan application, claiming tax returns, avoiding penalties, prompt visa application, official proof of income and expenses, claiming refund, purchasing high-value insurance plans. And it is also beneficial to file for a tax return even if the person has a very low income so that tax returns can be claimed. Benefits can also earn child support and bear living and housing expenses.
Defining Tax Credit and its mechanism
Tax credits are amounts paid out by the government for the people in need including people with disabilities, people needing help in child care, people who have low incomes. A tax credit also reduces how much is paid in taxes by letting the individual subtract a certain amount from the tax bill. Tax credits are of two types. One is refundable which can essentially earn a refund if the amount of credit is greater than the tax owed. The second type, which is non-refundable, can reduce the amount of tax owed. So in a nutshell it can also be seen as an extra income. Tax credits reduce the amount owed in taxes while tax deduction lowers the taxable incomes. For example, if the tax percentage is 15% will deduct 150 from a 1000$ income in a tax deduction. So it’s pretty obvious that tax credits are much more beneficial of the two.
