What Is A Basic Rate Tax Code? [Tax 101]

Tax codes can be confusing and may relate to federal, state or local taxes. So we have taken a look at what is a basic rate tax code, how codes are created, how to find and interpret them and finally how tax codes can affect your tax return. 

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What Is A Tax Code?

A tax code refers to a collection of laws under which the federal government imposes a range of taxes. State, county and city governments also use tax codes to authorize specific tax laws. 

An income tax code determines the rules which individuals, and businesses have to follow in order to pay a portion of their income. This is paid to the government body which has jurisdiction where their income is earned. 

The Inland Revenue Code (IRC) refers to Title 26 of the US Code which is the “consolidation and codification of the general and permanent laws of the United States.” It is more commonly called the IRS code as it is the Inland Revenue Service which enforces these laws. 

Title 26 of the US code comprises all the rules relevant to income, payroll, estate, sales, gift and excise taxes.

The term tax code can be applied to the series of numbers and letters that have significance for payroll tax, indirect tax or other tax purposes. However, the primary definition of a tax code is the unified set of laws which stipulate the statutory basis for the taxation system. 

Individual states may not use tax codes for their jurisdictions but instead insert tax rules into various elements of its laws. This means that they have not codified their tax laws. Federal tax laws started out as these types of individual revenue acts. 

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How Are Tax Codes Created?

Tax codes are the authorization of tax laws and legislation that has been passed by local, state or federal authorities. The codes are drafted and subsequently voted on by elected officials. When a majority votes to pass a tax code, it becomes a law. 

When a tax code is passed into law that law is inserted into the local, state or federal government’s set of tax laws. Federal tax laws, once passed, are assigned a code section or number and then added to the tax laws in the Inland Revenue Code. 

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How To Find Tax Codes

Not everyone will want to read the tax codes, and it is not necessary for the preparation of your tax return. The codes are quite complex and do not give enough detail for any helpful guidance as you do your taxes. 

If you do wish to read the tax codes they can be found online, and you may also be able to find them in printed form at a local library. 

It may be more likely that you will want to read your local or state tax codes. These should be available on the website of your local authority responsible for taxation. 

Interpreting Tax Codes

Tax codes are the absolute authority for tax, but there are other documents which interpret them and have substantial influence on them. 

The US Treasury has regulations for most tax code sections. These regulations give further guidance and explanations of the different tax codes. They also provide examples of how the tax codes are used making them easier to understand. 

Apart from the tax codes the Inland Revenue Service provides materials which although not actual tax codes must still be adhered to. 

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How Do Tax Codes Affect Your Return?

Tax codes provide the base for your tax return and are the ultimate authority for this obligation. The instructions that the IRS provides are designed to allow you to properly file your tax return in accordance with the relevant tax codes. 

During the course of preparing your tax return you will use the tax tables to work out how much tax you have to pay. These tables give you the tax rates and percentages that the Inland Revenue Service uses to calculate your tax liability. 

These rates and percentages are taken from the tax codes. In order to help you fill out your tax return the IRS provides this guidance with clear instructions in plain English. This means that there is no need for you to delve into the tax laws and understand them all. 

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Income Tax Rates

Income tax rates are calculated as percentages of your income which the government will then take in taxes. However, a single tax rate will not apply to your whole income and there are separate rates for different parts of your ‘taxable income’. 

This is the amount that is left over after you have claimed your deductions whether that is the standard deduction for your status or itemized deductions. There is a wide variety of tax rates and income levels and your individual circumstances will determine which apply to you. 

Most systems of tax, whether federal or state, are ‘progressive’. This means that as your taxable income increases so does the amount of tax that you are liable to pay. For example a single person with a taxable income of $10,275 or below will pay 10% income tax. 

As the amount of taxable income rises the rates increase to 12%, 22%, 24%, 32%, 35% and finally, 37%. The various ranges of taxable income are referred to as tax brackets. 

Of course, there are ways of reducing the amount of income which will be liable to tax through many legitimate methods. 

Most states levy income tax in the same manner as the federal government, but some impose a single tax rate regardless of the level of taxable income. This is known as a ‘flat tax’. 

Final Thoughts

All taxpayers have to comply with the tax codes and their underlying regulations. This is how individuals pay the income tax that applies to them and their circumstances. 

Despite the complexity of most tax codes the IRS does provide clear, free of charge guidance on how they work. 

While on the subject of your finances it is vital that your pay stubs are also in check. Our paystub generator will make sure that they are.