Tax rates depend on your income level and the type of income

The amount of tax you owe is not the same for everyone. The federal government uses a system called tax brackets, which means different portions of your income are taxed at different rates. If you earn $30,000 a year, you do not pay the same tax rate on every dollar as someone earning $100,000. The brackets change each year, and they also depend on whether you file as single, married filing jointly, head of household, or another status.

Your tax rate also depends on what kind of income it is. Wages from a job are taxed differently than investment income or self-employment income. Some types of income, like certain government benefits, are not taxed at all. Understanding which bracket you fall into and what type of income you have is the first step to knowing what you owe.

Key Takeaways

  • Federal tax brackets for 2024 range from 10% to 37%, and the rate you pay depends on your total income and filing status, not on a single flat rate.
  • Wages from employment are withheld by your employer, while self-employment income requires you to pay estimated taxes four times a year.
  • Investment income and capital gains are often taxed at lower rates than wages, but the exact rate depends on how long you held the investment.
  • State and local income taxes vary widely — some states have no income tax at all, while others tax income at rates up to 13%.
  • Social Security, SSI, SNAP, housing vouchers, and many other government benefits are not subject to federal income tax.

Federal income tax brackets for 2024

The federal government divides income into brackets, and each bracket has its own tax rate. For 2024, the rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. You do not pay 37% on all your income if you fall into the highest bracket — you only pay that rate on the portion of income above the threshold for that bracket.

The income ranges for each bracket depend on your filing status. A single person's brackets are different from a married couple filing jointly, which are different from a head of household. For example, in 2024, a single person enters the 22% bracket at $11,601 of taxable income, while a married couple filing jointly enters it at $23,201. These thresholds shift slightly each year to account for inflation.

Your taxable income is not the same as your total income. You subtract deductions — either the standard deduction or itemized deductions — before calculating which bracket you fall into. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. This means a single person earning $30,000 only pays tax on $15,400 of that income.

How employment taxes are withheld from your paycheck

If you work for an employer, your employer withholds federal income tax from each paycheck. The amount withheld is based on the information you provide on Form W-4, which you fill out when you start the job. The form asks about your filing status, number of dependents, and other income, so your employer can estimate how much to hold back.

Your employer also withholds Social Security tax (6.2% of wages) and Medicare tax (1.45% of wages). These are separate from income tax. Self-employed people pay both the employee and employer portions, totaling 15.3% for Social Security and Medicare combined, though they can deduct half of this on their tax return.

The amount withheld is not always exactly right. If too much is withheld, you get a refund when you file your tax return. If too little is withheld, you owe money. You can adjust your withholding during the year by filing a new W-4 with your employer if your situation changes — for example, if you get a second job or have a major life change.

Self-employment and business income taxes

If you are self-employed or run a business, you do not have an employer to withhold taxes for you. Instead, you are responsible for paying estimated taxes four times a year: April 15, June 15, September 15, and January 15. These payments cover both income tax and self-employment tax.

Self-employment tax is 15.3% of your net business income (after deducting business expenses). This covers Social Security and Medicare. You also owe federal income tax on your business income at the same bracket rates as wage earners. The total can be substantial — many self-employed people owe 25% to 40% of their net income in combined taxes.

If you do not pay estimated taxes and owe a large amount when you file your return, you may owe a penalty for underpayment. The IRS calculates this based on how much you should have paid each quarter. Keeping records of your income and expenses throughout the year makes it easier to calculate what you owe and avoid penalties.

Capital gains and investment income

Money you make from selling stocks, real estate, or other investments is called capital gains. The tax rate on capital gains depends on how long you held the investment. If you held it for one year or less, it is taxed as ordinary income at your regular bracket rate. If you held it for more than one year, it qualifies as a long-term capital gain and is taxed at lower rates: 0%, 15%, or 20%, depending on your income level.

Interest from savings accounts, bonds, and CDs is taxed as ordinary income at your regular bracket rate. Dividends from stocks are also usually taxed as ordinary income, though some may have access to dividends get the lower long-term capital gains rates. If you have significant investment income, you may also owe the Net Investment Income Tax, which is an additional 3.8% on investment income above certain thresholds.

Losses on investments can offset gains. If you sell an investment at a loss, you can use that loss to reduce your taxable gains. If your losses exceed your gains, you can deduct up to $3,000 of the excess loss against other income in that year, with any remaining loss carried forward to future years.

State and local income taxes

In addition to federal tax, most states charge income tax on wages and other income. The rates vary widely. Some states have no income tax at all — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Other states tax income at rates ranging from about 1% to over 13%.

A few states tax only certain types of income. Tennessee and New Hampshire, for example, tax only dividend and interest income, not wages. Some states also allow you to deduct federal taxes paid when calculating state tax, which reduces your state tax bill.

Local taxes also exist in some cities and counties. New York City, for example, charges a local income tax on top of state and federal taxes. If you live in one of these areas, your total tax burden can be significantly higher than the federal rate alone. Checking your state and local tax rates is important for understanding your full tax picture.

Income that is not subject to federal tax

Many types of income are not taxed by the federal government. Social Security benefits are generally not taxed, though in some cases a portion may be taxed if your total income exceeds certain thresholds. Supplemental Security Income (SSI) is never taxed. SNAP benefits, housing vouchers, and most other government assistance programs are not taxed.

Other non-taxable income includes gifts, inheritances, life insurance proceeds, and workers' compensation. Certain scholarships and educational grants are also not taxed if used for may have access to education expenses. If you receive a large gift or inheritance, you do not report it as income on your tax return.

Some types of income are partially non-taxable. For example, if you receive a distribution from a traditional IRA or 401(k), part of it may be non-taxable if you made after-tax contributions. Roth IRA withdrawals are generally not taxed if you meet certain conditions. Understanding which income is taxable and which is not can significantly affect what you owe.

Frequently Asked Questions

What is the difference between tax brackets and my actual tax rate?

Your tax bracket is the highest rate you pay, but you do not pay that rate on all your income. If you are in the 24% bracket, you pay 10% on the first portion, 12% on the next portion, 22% on the next, and 24% only on income above that threshold. Your actual average rate is lower than your bracket rate.

Do I owe taxes on unemployment benefits?

Yes. Unemployment benefits are taxed as ordinary income at your regular bracket rates. Your state unemployment office can withhold federal tax from your benefits if you request it, or you can pay estimated taxes quarterly. If no tax is withheld, you may owe a large amount when you file your return.

How do I know if I need to file a tax return?

You must file if your income exceeds the standard deduction for your filing status. For 2024, that is $14,600 for single filers and $29,200 for married couples filing jointly. Even if you earn less, filing may be worth it if you are owed a refund from taxes withheld or if you may have access to for refundable tax credits.

What happens if I do not pay my taxes?

The IRS charges penalties and interest on unpaid taxes. The failure-to-pay penalty is typically 0.5% of the unpaid tax per month, and interest compounds daily. If the IRS believes you intentionally did not pay, the penalty can be higher. Setting up a payment plan with the IRS is usually better than ignoring the debt.

Can I deduct my rent or housing costs on my taxes?

Renters cannot deduct rent as a general rule. Homeowners can deduct mortgage interest and property taxes, but only if they itemize deductions instead of taking the standard deduction. For most people, the standard deduction is larger, so itemizing does not save money. Self-employed people can deduct a portion of home expenses if they use part of their home for business.