posted on 06-06-2019

Federal Income Tax

Updated August 7, 2020

What is Federal Income Tax?

Federal income tax is a tax on a range of certain kinds of income. Taxpayers generally calculate and pay federal income tax by filing an IRS Form 1040 by April 15 of each year.

How Does Federal Income Tax Work?

The United States has a progressive tax system, which means that different portions of a person's or company's income are taxed at increasing rates (that's why the rates are often referred to as marginal tax rates). For example, the IRS might tax a single filer's $100,000 income as follows:

The first $8,025 is taxed at 10% = $802.50
The next $24,525 is taxed at 15% = $3,678.75
The next $49,100 is taxed at 25% = $12,275
The next and final $18,350 is taxed at 28% = $5,138
Total tax owed: $21,894.25

The highest federal tax bracket changes often, but it is usually around 35% of any income over about $375,000 (note that this excludes state taxes and social security/Medicare, which can add as much as another 17% to 18% in taxes, for a total of as much as 53% in taxes on additional income).

Why Does Federal Income Tax Matter?

Federal income taxes generate about 42% of the governments total tax revenue, according to the Tax Policy Center. This amounted to $2.2 trillion in 2010.

Not all taxpayers have to pay federal income tax. The amount owed is a function of a myriad of circumstances, including income levels, personal status and eligibility for deductions and credits. In some cases, taxpayers have remitted more than they owe, which generates a refund.

In general discourse, it is important to know the difference between federal tax brackets and federal tax rates. Many people assume that when they're in the 28% tax bracket, for example, that all of their income is taxed at 28%, which is not the case. As our example shows, you can be in the 28% federal tax bracket but actually have a 21.89% effective tax rate on your income. It is also important to note that states may impose their own income taxes on taxpayers, which will be over and above the federal income tax.