Final answer:
The ability-to-pay principle in the federal tax system requires individuals to pay taxes based on their economic capacity. Taxpayers must report all recognized income when filing their tax returns, and taxable income is calculated by subtracting allowable deductions and exemptions from their gross income.
Step-by-step explanation:
The concept that requires taxpayers to include all recognized income in gross income is known as the ability-to-pay principle. Under this principle, individuals are required to pay taxes based on their economic capability. In the United States tax system, taxable income is determined by subtracting deductions and exemptions from one's adjusted gross income. The federal tax system employs both the benefit principle and the ability-to-pay principle to establish tax obligations. The former stipulates that those who benefit from government services should pay taxes in proportion to their received benefits, whereas the latter argues that those with greater financial capacity should bear a heavier tax burden.
When preparing their tax returns, individuals must report all of their income, which can include wages, interest, dividends, and unemployment compensation. Taxable income is calculated based on this gross income minus any applicable standard deductions and exemptions. Failing to report income or pay taxes on that income can result in fines or even jail time, underscoring the importance of understanding one's tax responsibilities. Complexities arise with various income sources and eligibility for different tax credits, exemplifying why a comprehensive understanding of the tax system is vital.