Federal Income Tax: Understanding Your Obligations and Saving Money

Last updated 03/28/2024 by

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Summary:

Federal income tax is a tax levied by the federal government on your income. Understanding how it works can help you avoid costly mistakes when filing your tax return. Your federal income tax liability is based on your taxable income, which is calculated by subtracting allowable deductions and exemptions from your gross income. Federal income tax rates are progressive, meaning that the more income you earn, the higher your tax rate will be on each additional dollar of income. Tax deductions and credits can help reduce your federal income tax liability. In addition to federal income tax, you may also be subject to other federal taxes, such as Social Security tax and Medicare tax. If you are a dependent or have student loan interest, there may be specific tax rules that apply to you.

What is federal income tax?

Federal income tax is a tax on your income that goes to the federal government. Your income can come from a variety of sources, such as your job, investments, or self-employment. When you file your tax return each year, you report your income and calculate how much tax you owe based on your income level and other factors.

There are different types of income subject to federal income tax, including wages, salaries, tips, and bonuses. Investment income, such as interest, dividends, and capital gains, is also subject to federal income tax. If you’re self-employed, you’ll also need to pay self-employment tax, which covers your share of Social Security and Medicare taxes.

The federal government uses a system of tax brackets to determine how much tax you owe based on your income level. Tax rates increase as your income level goes up. For example, in 2022, the tax rate for single filers with income up to $10,275 is 10%, while the tax rate for single filers with income over $523,600 is 37%.

Your federal income tax obligations

Not everyone is required to pay federal income tax. If your income is below a certain threshold, you may not need to file a tax return or pay any tax. The specific threshold depends on your filing status and age.

If you do need to pay federal income tax, you’ll need to file a tax return each year. The deadline to file your tax return is usually April 15, although it can vary slightly depending on weekends and holidays. If you’re self-employed, you may need to make estimated tax payments throughout the year to avoid penalties.

Failing to file or pay your federal income tax can result in penalties and interest charges. The penalties can be significant, so it’s important to understand your obligations and meet all deadlines.

Types of taxable income

The first thing to understand about federal income tax is the types of income that are subject to it. Here are some examples of income that are typically subject to federal income tax:

Wages and salaries: This includes income from your job, including bonuses, commissions, and tips.
Interest and dividends: This includes income from investments such as savings accounts, bonds, and stocks.
Capital gains: This includes income from the sale of assets such as stocks, real estate, and artwork.
Self-employment income: This includes income from running your own business or working as a freelancer or contractor.

It’s important to note that some types of income are not subject to federal income tax. For example, gifts, inheritances, and life insurance payouts are typically tax-exempt.

Gross income vs. net income

When it comes to federal income tax, there are two types of income to be aware of: gross income and net income. Gross income is the total amount of income you earn before any deductions or expenses are taken out. Net income is the amount of income you have left after deductions and expenses are subtracted from your gross income.

To reduce your gross income and increase your net income, you can take advantage of deductions such as retirement contributions, student loan interest, and charitable donations.

Filing federal income taxes

Every year, you must file a federal income tax return with the Internal Revenue Service (IRS) if you earn income above a certain threshold. The exact threshold depends on your filing status and age. For example, in 2022, single filers under age 65 must file a federal income tax return if they earned more than $12,950.

To file a federal income tax return, you’ll need to complete the appropriate forms and submit them to the IRS. The deadline for filing federal income tax returns is typically April 15th, although it may be extended due to holidays or other factors.

If you fail to file your federal income tax return or pay the taxes you owe by the deadline, you may be subject to penalties and interest charges.

Federal income tax brackets

Federal income tax brackets are a way of categorizing taxpayers based on their income levels. The federal income tax system is progressive, which means that the more you earn, the higher your tax rate will be.

Here are the federal income tax brackets and rates for tax year 2022:

10%: Up to $10,275 for single filers and $20,550 for married filing jointly.
12%: $10,276 to $42,900 for single filers and $20,551 to $85,800 for married filing jointly.
22%: $42,901 to $87,800 for single filers and $85,801 to $175,750 for married filing jointly.
24%: $87,801 to $183,250 for single filers and $175,751 to $365,000 for married filing jointly.
32%: $183,251 to $418,400 for single filers and $365,001 to $418,400 for married filing jointly.
35%: $418,401 to $450,000 for single filers and $418,401 to $900,000 for married filing jointly.

37%: Over $450,000 for single filers and over $900,000 for married filing jointly.

How tax brackets work

It’s important to note that you are not taxed at a single tax rate on all of your income. Instead, you are taxed at progressively higher rates on different portions of your income that fall within each tax bracket. For example, if you are a single filer with $50,000 in taxable income for 2022, your tax liability will be calculated as follows:

The first $10,275 will be taxed at 10%, resulting in a tax of $1,028.
The next $32,625 ($42,900 – $10,275) will be taxed at 12%, resulting in a tax of $3,915.
The remaining $7,400 ($50,000 – $42,900) will be taxed at 22%, resulting in a tax of $1,628.
The total tax liability for this hypothetical single filer would be $6,571.

Tax deductions

Tax deductions are expenses that can be subtracted from your taxable income, reducing the amount of income subject to federal income tax. Some common tax deductions include:

Retirement contributions: Contributions to a traditional IRA or 401(k) can be tax-deductible, reducing your taxable income.
Mortgage interest: If you own a home and have a mortgage, you may be able to deduct the interest paid on your mortgage from your taxable income.
Charitable donations: Donations to qualified charitable organizations can be tax-deductible.
State and local taxes: You may be able to deduct state and local income, sales, and property taxes from your taxable income.

Tax credits

Tax credits are dollar-for-dollar reductions in your tax liability. Some common tax credits include:

Child tax credit: A credit of up to $2,000 per child under age 17.
Earned income tax credit: A credit for low-to-moderate income earners.
American opportunity tax credit: A credit for qualified education expenses.

State vs. federal income tax

In addition to federal income tax, many states also have their own income tax systems. The rules and rates vary from state to state, so it’s important to understand your state’s income tax obligations if you live and work there.

Individual vs. other federal income taxes

Finally, it’s worth noting that federal income tax is just one type of federal tax that you may be subject to. Other types of federal taxes include:

Social Security tax: A tax that funds the Social Security program, which provides retirement and disability benefits.
Medicare tax: A tax that funds the Medicare program, which provides health insurance to seniors.
Self-employment tax: A tax that self-employed individuals must pay to fund Social Security and Medicare.

FAQs

Do I have to file a federal income tax return if I’m a dependent?

It depends on your income. If you are a dependent and your income is below a certain threshold, you may not need to file a federal income tax return. However, if your income exceeds the threshold, you will need to file a return.

Can I deduct student loan interest on my federal income tax return?

Yes, you can deduct up to $2,500 in student loan interest from your taxable income.

What happens if I can’t pay my federal income taxes?

If you can’t pay your federal income taxes by the deadline, you may be able to set up a payment plan with the IRS. However, you may be subject to penalties and interest charges.

Key takeaways

Federal income tax is a tax levied by the federal government on your income.
Your federal income tax liability is based on your taxable income, which is calculated by subtracting allowable deductions and exemptions from your gross income.
Federal income tax rates are progressive, meaning that the more income you earn, the higher your tax rate will be on each additional dollar of income.
Tax deductions and credits can help reduce your federal income tax liability.
In addition to federal income tax, you may also be subject to other federal taxes, such as Social Security tax and Medicare tax.
If you are a dependent or have student loan interest, there may be specific tax rules that apply to you.

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