What income tax is

Income tax is a percentage of your earnings that you pay to the federal government and, in most states, to your state government as well. The amount you owe depends on how much money you made during the year and which tax bracket that income falls into. The federal government uses income tax to fund programs like Social Security, Medicare, national defense, and infrastructure.

Income can come from wages at a job, self-employment, rental property, investments, or other sources. The tax system is progressive, meaning people who earn more money pay a higher percentage in taxes than people who earn less. This is done through tax brackets — ranges of income that are each taxed at a different rate.

Most people have income tax withheld from their paychecks automatically by their employer. Self-employed people and those with other income sources typically pay estimated taxes four times a year. At the end of the year, you file a tax return to report all your income and either pay what you still owe or receive a refund if too much was withheld.

Key Takeaways

  • Income tax is a percentage of your earnings paid to the federal government and most state governments, with rates that increase as your income increases.
  • Most employees have income tax automatically withheld from their paychecks, while self-employed people pay estimated taxes quarterly.
  • Your tax bracket depends on your total income for the year, and different portions of your income are taxed at different rates.
  • You file a tax return each year to report all income and either pay additional tax owed or receive a refund of overpaid amounts.

How tax brackets work

The United States uses a system of tax brackets, not a flat tax rate. This means your income is divided into sections, and each section is taxed at a different rate. For example, in 2024, the first portion of your income might be taxed at 10%, the next portion at 12%, and so on, depending on your total earnings.

A common misunderstanding is that moving into a higher tax bracket means all your income is taxed at that higher rate. That is not how it works. Only the income that falls within each bracket is taxed at that bracket's rate. If you earn $50,000 and the 12% bracket covers income from $11,000 to $44,725, then only the portion of your income above $44,725 is taxed at 12%. The income below that threshold is taxed at the lower rates that apply to those lower brackets.

Tax brackets change each year and are adjusted for inflation. The IRS publishes new brackets annually, usually in late fall for the following tax year. Your filing status — single, married filing jointly, head of household, or married filing separately — also affects which brackets apply to you.

Federal versus state income tax

The federal government collects income tax from all working Americans, but not all states do. Nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income). The remaining 41 states and the District of Columbia collect their own income tax in addition to federal tax.

State income tax rates vary widely. Some states have a flat rate — everyone pays the same percentage regardless of income. Others use a progressive system similar to the federal system, with multiple brackets. A few states have very low rates, while others tax income more heavily than the federal government does.

When you file your federal tax return, you report your income to the IRS. When you file a state return (if your state requires one), you report the same income to your state tax authority. Some states allow you to deduct federal taxes paid, while others do not. The rules differ by state, so it is worth understanding how your state's system works.

What counts as income for tax purposes

Income for tax purposes includes wages from employment, but also many other sources. Self-employment income, rental income from property you own, interest earned on savings accounts or bonds, dividends from stocks, capital gains from selling investments or property, and income from side work or freelancing all count as taxable income.

Some types of money do not count as taxable income. Gifts, inheritances, and life insurance payouts are generally not taxed. Certain government benefits, like Supplemental Security Income (SSI) and some forms of disability payments, are not taxable. Child support received is not taxable income, though alimony is. The rules are specific and sometimes complicated, which is why many people consult tax professionals or use tax software to make sure they report correctly.

If you have income from multiple sources, you add it all together to find your total income for the year. This total income is what determines your tax bracket and how much tax you owe overall.

How withholding and estimated taxes work

Most people who work for an employer have federal income tax withheld from each paycheck. When you start a job, you fill out a W-4 form that tells your employer how much to withhold based on your expected annual income and personal situation. The employer sends that withheld money to the IRS on your behalf throughout the year.

If you are self-employed or have income that is not subject to withholding — such as rental income or investment gains — you are responsible for paying estimated taxes four times a year. These payments are due on April 15, June 15, September 15, and January 15 of the following year. You calculate what you expect to owe for the year and pay roughly one-quarter of that amount each quarter.

The goal of withholding and estimated taxes is to spread your tax payment throughout the year rather than requiring one large payment on April 15. If you withhold too much, you receive a refund when you file your return. If you withhold too little, you owe additional tax when you file.

Filing your tax return

You must file a federal income tax return if your income exceeds a certain threshold. For 2024, that threshold varies based on age and filing status, but generally ranges from about $13,000 to $27,000 for most people. Even if you do not have to file, you may want to file anyway if you had taxes withheld from your paychecks, because you might be owed a refund.

When you file, you report all income from the previous year and claim any deductions or credits you are may have access to to. A deduction reduces the amount of income that is subject to tax. A credit directly reduces the amount of tax you owe. Common deductions include the standard deduction (a set amount everyone can deduct) or itemized deductions (specific expenses like mortgage interest or charitable donations). Common credits include the Earned Income Tax Credit (EITC) for lower-income workers and the Child Tax Credit for parents.

You can file your return using tax software, by mail, or with the help of a tax professional. The deadline to file is usually April 15, though you can request an extension if you need more time. If you owe money, you must pay it by April 15 or face penalties and interest, even if your return is not yet filed.

Frequently Asked Questions

Why do I owe taxes if my employer already withheld money?

Withholding is an estimate based on the W-4 form you filled out. If your actual tax liability is higher than what was withheld — because you had a raise, took a second job, or had other income — you owe the difference. If your withholding was too high, you get a refund instead.

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 is subject to tax. A credit directly reduces your tax bill dollar-for-dollar. A $1,000 credit saves you $1,000 in taxes, while a $1,000 deduction saves you taxes only on that $1,000 of income — the actual savings depends on your tax bracket.

Do I have to file taxes if I did not earn much money?

You must file if your income exceeds the threshold for your age and filing status. However, even if you are not required to file, you should file if you had taxes withheld from paychecks or if you worked and earned income, because you may be owed a refund or be may have access to to credits like the EITC.

What happens if I do not pay my taxes?

The IRS charges penalties and interest on unpaid taxes. The longer you wait, the more you owe. The IRS can also place a lien on your property, garnish your wages, or take other collection actions. If you cannot pay in full, you can set up a payment plan with the IRS.

Can I deduct everything I spend money on?

No. Only certain expenses count as deductions. If you take the standard deduction, you do not itemize specific expenses at all — you simply deduct a set amount. If you itemize, only may have access to expenses like mortgage interest, property taxes, charitable donations, and medical expenses above a certain threshold can be deducted. Personal expenses like groceries or entertainment do not count.