Personal income tax is a fundamental aspect of every working financial of individual obligations. It affects a broad range of activities, from how much you earn to how much you save. Article of Apolo Lawyers  aims to clarify the intricacies of personal income tax, helping you understand what it is, who needs to pay it, how it is calculated, and the scenarios in which you might be exempt. Whether you are an employee, a business owner, or a retiree, comprehending these aspects is crucial for effective financial planning and compliance with the law. In case you need advice, please contact us via email at contact@apolo.com.vn or Hotline - (+84) 903 419 479 for the best advice and support.

1. What is personal income tax?

Personal income tax is a tax levied by governments on the income earned by individuals and entities. It is one of the primary sources of revenue for governments, funding essential public services such as healthcare, education, infrastructure, and national defense. The concept is straightforward: individuals pay a portion of their earnings, from various sources, to the government.

Income subject to personal income tax can come from numerous sources, including salaries, wages, business profits, investment returns, rental income, and other earnings. The tax system aims to be equitable, ensuring that those with higher incomes pay a larger share, which is typically achieved through a progressive tax structure. In a progressive tax system, the tax rate increases as the income of taxpayers increases, thereby placing a greater tax burden on those with a higher ability to pay.

Several key principles guide the design and implementation of personal income tax systems:

• Progressivity: Higher income levels are taxed at higher rates to promote fairness and reduce income inequality.
• Equity: Ensures that individuals in similar financial situations pay similar taxes (horizontal equity) and those with greater financial capacity pay more (vertical equity).
• Simplicity: Tax systems should be easy for taxpayers to understand and comply with, minimizing compliance and administrative costs.
• Efficiency: The tax system should collect revenue without significantly distorting economic behavior, ensuring that taxes do not discourage work or investment.

In practice, calculating personal income tax involves determining gross income, subtracting allowable deductions, and applying the appropriate tax rates to the resulting taxable income. Deductions and credits play a crucial role, as they can significantly reduce taxable income and the overall tax burden. The specific rules and rates vary of each country, making it important for taxpayers to understand the tax laws applicable in their jurisdiction.

2. Who needs to pay personal income tax?

Understanding who needs to pay personal income tax is essential for ensuring compliance with tax laws and avoiding legal issues. Several factors determine tax liability, including residency status, income level, and the types of income earned. This section explores these factors in detail, providing a comprehensive understanding of who is obligated to pay personal income tax.

Residency Status
Residency status is a critical factor in determining tax liability. Most countries categorize individuals as residents or non-residents for tax purposes, with different rules applying to each group.

Residents
Residents are typically required to pay personal income tax on their worldwide income. This means that all income earned, regardless of its source, is subject to tax in the home country of resident. Residency is usually determined by factors such as:

• Physical Presence: Many countries use a physical presence test, where an individual is considered a resident if they spend a certain number of days within the country during a tax year. 
• Permanent Home: Having a permanent home or domicile in a country can also establish residency. This includes owning or renting a home and having family or economic ties within the country.
• Intent: Some countries consider the intent of the individual, looking at factors like long-term plans, employment contracts, and other indicators of a permanent move.

Non-Residents
Non-residents are typically only required to pay tax on income sourced within the country. This includes earnings from employment, business activities, and investments within the country. Non-residents may also be subject to different tax rates and rules compared to residents. For instance, they might face higher withholding tax rates on certain types of income, such as dividends or interest.

Income Thresholds
Income thresholds play a significant role in determining who needs to file a tax return and pay personal income tax. These thresholds vary by country and are often adjusted annually to account for inflation and changes in economic conditions. If an income of individual exceeds the established threshold, they must file a tax return and pay the applicable taxes.

Everything You Need to Know About Personal Income Tax

Filing Requirements
Different income thresholds apply based on filing status, age, and type of income. Common filing statuses include single, married filing jointly, married filing separately, head of household, and qualifying widow(er). Each status has its own threshold, reflecting different tax rates and standard deductions. 

Special Cases
Certain types of income may have specific filing requirements, regardless of overall income level. Examples include:

• Self-Employment Income: Individuals with net earnings from self-employment above a certain amount (e.g., $400 in the United States) must file a tax return.
• Investment Income: Taxpayers with significant investment income, such as capital gains or dividends, may need to file even if their total income is below the general threshold.
• Foreign Income: Some countries require residents to report and pay tax on foreign income, even if it falls below the domestic filing threshold.

Types of Income
Different types of income are subject to varying tax rules, impacting who needs to pay personal income tax. It is crucial to understand these categories to ensure all taxable income is reported correctly.

• Earned Income

Earned income includes wages, salaries, tips, and bonuses from employment, as well as earnings from self-employment. This is the most common type of income subject to personal income tax. Employees typically have taxes withheld from their paychecks by their employers, while self-employed individuals must make estimated tax payments throughout the year.

• Investment Income

Investment income encompasses interest, dividends, and capital gains. Each type of investment income may be taxed differently:

- Interest Income: Interest earned on savings accounts, bonds, and other interest-bearing investments is generally taxable.

- Dividends: Dividends from stocks can be classified as qualified or non-qualified, with qualified dividends typically taxed at a lower rate.

- Capital Gains: Profits from the sale of assets, such as stocks or real estate, are subject to capital gains tax. The rate may vary depending on the holding period (short-term vs. long-term).

• Rental Income

Rental income from leasing property is also subject to personal income tax. Landlords must report rental payments and other related earnings, such as fees for services provided to tenants. Deductible expenses, like mortgage interest, property taxes, and maintenance costs, can offset rental income.

3. How to calculate personal income tax

Personal income tax payable=Taxable income × Applicable tax rate

Wherein:

The taxable income shall be determined by the following formula:

• Taxable income= Gross income − Allowable deductions

For the purposes of calculating taxable income, gross income shall be computed as follows:

• Gross income=Total income − Exempt and Non-taxable amounts

Calculating personal income tax can be complex, involving multiple steps and considerations. Here is a basic overview of how to calculate your tax liability.

Step 1: Determine gross income
Gross income is the total income you receive before any deductions or exemptions. This includes wages, salaries, bonuses, investment income, and other sources of income.

Step 2: Subtract allowable deductions
Deductions are specific expenses that can be subtracted from your gross income to determine your taxable income. Common deductions include:

• Standard Deduction: A fixed amount that can be deducted by all taxpayers.
• Itemized Deductions: Specific expenses such as mortgage interest, charitable contributions, and medical expenses.
• Retirement Contributions: Contributions to certain retirement accounts may be deductible.
• Educational Expenses: Some education-related costs may be deductible.

Step 3: Apply exemptions and credits
Exemptions reduce your taxable income further. Personal exemptions for yourself and dependents can lower your taxable income. 

Step 4: Calculate taxable income
Taxable income is determined by subtracting all allowable deductions and exemptions from your gross income. This is the amount on which you will be taxed.

Step 5: Apply tax rates
Tax rates are applied to your taxable income to calculate your tax liability. Most systems use a progressive tax rate structure, where different portions of your income are taxed at different rates. 

Step 6: Subtract prepaid taxes and credits
If you have already made tax payments through withholding or estimated tax payments, you can subtract these amounts from your tax liability. Any remaining amount is what you owe, or if you have overpaid, you may be eligible for a refund.

In accordance with Article 4 of the Personal Income Tax Law, specific exemptions from Personal Income Tax (PIT) are prescribed as follows:

• Income derived from the transfer of real estate between spouses, between parents and children, etc.
• Income derived from the transfer of residential houses, land use rights (LUR), and assets attached to residential land of individuals in cases where the individual owns only one residential house and one piece of residential land.
• Income derived from the value of LUR allocated by the state to individuals.
• Income derived from inheritance or gifts of real estate between spouses, between parents and children, etc.
• Portion of wages for working night shifts or overtime, which is paid at a higher rate compared to daytime wages, as stipulated by law.
• Income derived from interest on deposits at credit institutions, and interest from life insurance contracts.

​Everything You Need to Know About Personal Income Tax

4. Exemptions from personal income tax

There are various situations in which you might be exempt from paying personal income tax. Understanding these exemptions can help you legally reduce your tax burden.

• Low Income

Many tax systems have income thresholds below which individuals are not required to pay taxes. If your income falls below these thresholds, you may be exempt from filing a tax return and paying taxes.

• Specific Types of Income

Certain types of income may be exempt from taxation. Common examples include:

- Gifts and Inheritances: Generally, gifts and inheritances are not considered taxable income.

- Insurance Payouts: Proceeds from life insurance policies are typically tax-exempt.

- Municipal Bond Interest: Interest earned on municipal bonds may be exempt from federal income tax.

​Understanding the various types of income that are subject to personal income tax is essential for accurate tax reporting and compliance

• Retirement Contributions

Contributions to specific retirement accounts, such as 401(k)s or IRAs, may be tax-deductible, effectively reducing your taxable income. Additionally, some retirement benefits may be exempt from taxation under certain conditions.

• Education-Related Exemptions

Scholarships, grants, and tuition reductions may be tax-exempt if they are used for qualified educational expenses. Additionally, some education savings plans offer tax advantages.

• Tax Treaties

Tax treaties between countries can affect your tax obligations, particularly for expatriates and non-residents. These treaties can provide exemptions or reduced tax rates for certain types of income.

Navigating the complexities of personal income tax can be challenging, but understanding the basics can help you manage your finances more effectively. By knowing what personal income tax is, who needs to pay it, how it is calculated, and the exemptions available, you can ensure compliance with the law while optimizing your tax situation. Always consider seeking advice from a tax professional to tailor these general principles to your specific circumstances and stay updated on any changes in tax laws that may affect you.

>>> Xem thêm: 07 Cases in which The Court returns a civil lawsuit petition

>>> Xem thêm: Recruitment of employees: Ensure compliance with legal regulations.

APOLO LAWYERS