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In the U.S., the Internal Revenue Service (IRS) collects taxes and enforces tax law.6
The IRS employs a complex set of rules and regulations regarding reportable and
taxable income, deductions, credits, et al. 7 The agency collects taxes on all forms of
income, such as wages, salaries, commissions, investments, and business earnings. 8
The personal income tax the government collects can help fund government programs
and services, such as Social Security, national security, schools, and roads. 9
The IRS offers a series of income tax deductions and tax credits that taxpayers can
make use of to reduce their taxable income. While a deduction can lower your taxable
income and the tax rate that is used to calculate your tax, a tax credit reduces your
income tax by giving you a larger refund of your withholding.
The IRS offers tax deductions for healthcare expenses, investments, and certain
education expenses. For example, if a taxpayer earns $100,000 in income and qualifies
for $20,000 in deductions, the taxable income reduces to $80,000 ($100,000 - $20,000
= $80,000).
Tax credits exist to help reduce the taxpayer's tax obligation or amount owed. They
were created primarily for those in middle-income and low-income households. To
illustrate, if an individual owes $20,000 in taxes but qualifies for $4,500 in credits, their
tax obligation reduces to $15,500 ($20,000 - $4,500= $15,500). 1 1
However, both of these states are set to eliminate those taxes on investment income
and interest, and it is projected that the number of states in the U.S. with no income tax
will reach nine in 2025.
For taxpayers, it may not necessarily be cheaper to live in a state that does not levy
income taxes. This is because states often make up the lost revenue with other taxes or
reduced services. In addition, there are other factors that determine the affordability of
living in a state, including healthcare, cost of living, and job opportunities.