Income tax is calculated by adding up what you earned, subtracting certain expenses or deductions, and then applying the tax rate for your income level

The Internal Revenue Service (IRS) uses a straightforward formula, though the details change based on your situation. You report all income sources — wages, self-employment, investments, rental property — then subtract either the standard deduction (a fixed dollar amount that depends on your filing status and age) or itemized deductions (specific expenses you list out). What remains is your taxable income. You then look up the tax rate that applies to that income amount using IRS tax tables or brackets, and that tells you what you owe.

The process happens in the same order every year. You gather documents showing what you earned. You decide whether to use the standard deduction or itemize. You calculate taxable income. You find your tax using the rate tables. You compare that to what your employer already withheld from your paychecks (or what you paid in estimated taxes if you're self-employed). The difference — either a refund or an amount still due — is what you settle when you file.

Key Takeaways

  • Taxable income is calculated by taking your total income and subtracting either the standard deduction or your itemized deductions, whichever is larger.
  • The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly, though these amounts change each year.
  • Tax brackets are progressive, meaning different portions of your income are taxed at different rates — the rate goes up as your income goes up.
  • What you actually owe depends on how much your employer withheld from your paychecks throughout the year; if too much was withheld, you get a refund.

The standard deduction versus itemizing

Most people use the standard deduction, which is a single dollar amount you subtract from your total income. For the 2024 tax year, the standard deduction is $14,600 if you file as single, $29,200 if you file as married filing jointly, and $21,900 if you file as head of household. These amounts increase slightly each year to account for inflation. If you are 65 or older, you get an additional deduction amount on top of the standard deduction.

Some people instead itemize deductions, which means listing out specific expenses the IRS allows you to deduct — mortgage interest, state and local taxes (up to $10,000), charitable donations, and medical expenses above a certain threshold. You add these up and use that total instead of the standard deduction. Itemizing only makes sense if your total itemized deductions are larger than the standard deduction for your filing status. Most people find the standard deduction is larger, so they use that instead.

How tax brackets work

The United States uses a progressive tax system, which means your income is taxed in layers at different rates. You do not pay one single rate on all your income. Instead, a portion of your income is taxed at 10%, a portion at 12%, a portion at 22%, and so on, depending on how much you earn. The income ranges for each rate are called tax brackets, and they change each year.

For example, in 2024, a single filer pays 10% on the first $11,600 of taxable income, then 12% on income between $11,601 and $47,150, then 22% on income between $47,151 and $100,525, and so on. If your taxable income is $50,000, you do not pay 22% on all of it — you pay 10% on the first $11,600, 12% on the next $35,550, and 22% on the remaining $2,850. The IRS publishes new bracket amounts each year, and tax software or the IRS website shows you which brackets apply to your filing status.

Income sources that must be reported

You must report all income you receive, regardless of whether you received a tax form for it. This includes wages from an employer (reported on a W-2 form), self-employment income, interest from a bank account, dividends from investments, rental income, and income from side work or gig jobs. If you received more than $600 in payment from a single source for services (such as freelance work), that payer may send you a 1099-NEC or 1099-MISC form, though you must report the income even if you do not receive a form.

Some income is not taxable — for example, gifts, inheritances, and certain government benefits like Supplemental Security Income (SSI). However, if you are unsure whether a particular type of income must be reported, the IRS website or a tax professional can clarify. Failing to report income that should have been reported can result in penalties and interest, so it is safer to report something and let the IRS tell you it was not necessary than to omit it.

Tax withholding and refunds

When you work for an employer, they withhold a portion of each paycheck and send it to the IRS on your behalf. The amount withheld depends on the W-4 form you filled out when you started the job. That form asks about your filing status, number of dependents, and other income, and the employer uses it to calculate how much to withhold from each check. The goal is to withhold roughly the amount of tax you will actually owe, so that when you file your return, you break even.

In practice, withholding is often too much or too little. If your employer withheld more than you owe, you receive a refund when you file. If your employer withheld less than you owe, you must pay the difference. You can adjust your withholding at any time by submitting a new W-4 to your employer. If you are self-employed, you do not have an employer withholding for you, so you must pay estimated taxes quarterly (four times per year) to avoid owing a large amount when you file.

Credits and deductions that reduce your tax

Beyond the standard deduction, there are tax credits and other deductions that can lower what you owe. A tax credit directly reduces the amount of tax you owe — for example, the Earned Income Tax Credit (EITC) for lower-income workers, or the Child Tax Credit for parents. These are more valuable than deductions because they reduce your tax dollar-for-dollar, whereas a deduction only reduces your taxable income.

There are also above-the-line deductions, which you can claim even if you use the standard deduction. These include contributions to a traditional IRA (up to a limit), student loan interest (up to $2,500 per year), and educator expenses. The IRS website lists all available credits and deductions, and tax software will ask you questions to determine which ones you may be able to claim.

Filing status and how it affects your tax

Your filing status determines your standard deduction amount, which tax brackets apply to you, and which credits you can claim. The main filing statuses are single, married filing jointly, married filing separately, head of household, and may have access to widow(er). Most people file as single or married filing jointly. Head of household applies if you are unmarried and pay more than half the household expenses for yourself and a dependent. Your filing status is based on your situation on December 31 of the tax year you are filing for.

Married couples filing jointly typically pay less total tax than two single filers with the same combined income, which is why this status is often advantageous. However, some couples benefit from filing separately if one spouse has significant deductions or credits. The IRS website has a tool to help you determine your correct filing status, and tax software will walk you through the options.

Frequently Asked Questions

Do I have to file a tax return if I did not earn much money?

You must file if your income exceeds the standard deduction for your filing status. For 2024, that means a single person with more than $14,600 in income must file. However, even if you earned less, filing may be worth it — you could receive a refund of taxes withheld, or claim the Earned Income Tax Credit, which is a refundable credit that can result in money back even if you owe no tax.

What is the difference between a tax deduction and a tax credit?

A deduction reduces your taxable income, so it lowers the amount of income that gets taxed. A credit directly reduces the tax you owe. A $1,000 deduction might save you $220 in tax (if you are in the 22% bracket), but a $1,000 credit saves you $1,000. Credits are more valuable, which is why the IRS limits who can claim them.

Can I change my tax withholding if I think too much is being taken from my paycheck?

Yes. You can submit a new W-4 form to your employer at any time to adjust your withholding. If you want less withheld (so you have more money in each paycheck), you can claim more allowances or adjust the extra withholding amount. If you want more withheld (so you get a larger refund), you can do the opposite. The IRS website has a withholding calculator to help you figure out the right amount.

What happens if I do not report all my income?

The IRS matches tax returns against W-2 forms, 1099 forms, and bank records. If you do not report income that should have been reported, the IRS will likely catch it and send you a bill for the unpaid tax, plus penalties and interest. It is always safer to report income and let the IRS tell you it was not necessary than to omit it.