## What Is Federal Income Tax?

The United States federal income tax is levied by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. Federal income taxes for individuals apply to all forms of earnings, including wages, salaries, commissions, bonuses, tips, investment income, and certain types of unearned income.

The federal income tax system in the U.S. is progressive, which means taxpayers fall into different tax brackets based on their income. There are multiple tax brackets, with higher portions taxed at higher rates. Percentage ranges and income thresholds are set by the IRS.  

### Key Takeaways

*   The federal income tax is the largest source of revenue for the U.S. government.
*   Federal income tax is used for expenses ranging from building and repairing the country's infrastructure to providing education, public transportation, and disaster relief.  
    
*   Federal income taxes are based on the individual's income and filing status.
*   Federal income taxes on individuals can be reduced by certain tax deductions, notably for mortgage interest. Tax credits such as the Earned Income Tax Credit provide benefits to specific groups of taxpayers.
*   Federal income taxes are levied by the [IRS](https://www.investopedia.com/terms/i/irs.asp) while state income taxes are collected by the state or states in which a taxpayer lives and earns income.

![Federal Income Tax: A progressive tax applied by the government on the annual earnings of individuals, corporations, trusts, and other legal entities to fund programs and services.](https://www.investopedia.com/thmb/j1ND0KF7gu1UWwcTsJMBNnCjne8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/federal_income_tax.asp-final-291f94ef8d8e46ab90d259604a5bd868.png)

*— Investopedia / Zoe Hansen*

## How Federal Income Tax Works

When you pay taxes to the U.S. government, or to your state or local government, you’re investing in your economy, as the government uses the funds to provide services. These include:

*   Building, repairing, and maintaining infrastructure
*   Funding the pensions and benefits of government workers
*   Funding Social Security programs
*   Funding major health programs, including Medicare, Medicaid, CHIP, and marketplace subsidies
*   Funding safety net programs for lower-income households
*   Funding defense and national security programs
*   Providing education, health, agriculture, utilities, and public transportation programs
*   Embarking on new feats such as space exploration
*   Providing emergency disaster relief

The largest source of revenue for the federal government comes from taxes on the [income](https://www.investopedia.com/terms/i/incometax.asp) of its residents. Personal income taxes account for half of the country's tax revenue, while corporate taxes make up only a small percentage.

> **Fast Fact**
>
> The U.S. government collects trillions in revenue each year, but often outspends that number, which results in a budget deficit.

## Types of Taxable Income

Generally speaking, there are two types of [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp): earned income and unearned income. 

Earned income is paid by an employer or earned by a self-employed person. The most common forms of earned income are:

*   Wages, whether by salary or hourly pay
*   Business income or income from operations
*   Pensions and other forms of retirement benefits
*   Unemployment benefits
*   Sick pay and other forms of fringe benefits
*   Self-employment income

Unearned income, or passive income, is mainly earned through investing. The most common forms of unearned income are:

*   Interest and dividend income
*   Royalties or residual income
*   Cryptocurrency trading
*   Sales of assets such as stocks at a profit  
    

## Gross Income vs. Net Income

Workers receive their earnings either as [net income](https://www.investopedia.com/terms/n/netincome.asp), also known as take-home pay, or [gross income](https://www.investopedia.com/terms/g/grossincome.asp).

Net income is the total amount received after taxes, benefits, and voluntary contributions are deducted from a paycheck. When taxes are withheld, it means the company or payer has paid the tax to the government on the worker’s behalf.

The amount your employer withholds for taxes depends on how much you earn and the information you gave your employer on Form W-4.

[All money earned](https://www.investopedia.com/when-not-to-tip-8736382), whether as a wage, salary, cash gift from an employer, business income, tips, gambling income, bonuses, or unemployment compensation, constitutes income for federal tax purposes.

## Filing Federal Income Taxes

Federal income taxes are reported and remitted to the IRS on forms created by the U.S. Department of Treasury and filed, usually electronically.

The primary form used to report federal income taxes is Form 1040, which records your income for the year and the taxes you already paid during the year. Form 1040-SR is an optional version of the tax return for those who are 65 and older.

This single form is all that is needed for taxpayers with uncomplicated financial lives. Hundreds of other forms are available to record special situations, from profits and losses in the stock market to itemized deductions.

The first page of Form 1040-SR is shown below. All pages of Form 1040-SR are available on the [IRS website](https://www.irs.gov/pub/irs-pdf/f1040s.pdf).

## Federal Income Tax Brackets

The federal income tax is levied according to a [progressive tax system](https://www.investopedia.com/terms/p/progressivetax.asp), where higher-income earners are taxed at higher rates. The tables below show the most recent tax brackets and rates.

## How Tax Brackets Work

The U.S. uses a progressive tax system, meaning taxpayers pay more incremental tax as they earn more income. This system aims to provide inherent tax benefits to lower-income individuals and collect [more taxes from higher-income individuals](https://www.investopedia.com/financial-edge/0212/how-getting-a-raise-affects-your-taxes.aspx).

[Tax brackets](https://www.investopedia.com/terms/t/taxbracket.asp) are often described as a range of income with an associated percentage. For example, for 2023 federal income taxes, taxpayers who earned between $44,726 and $95,375 were in the 22% tax bracket. This means their earnings between these two amounts were assessed at a 22% tax rate. Earnings below $44,726 were assessed at a lower rate, and earnings above $95,375 were assessed at a higher rate.   

### Marginal Tax Rate vs. Effective Tax Rate

As an example, for the 2024 tax year, an individual who was single and earned $80,000 annually fell into the 22% marginal tax bracket. This means the taxpayer was responsible for $13,093 in taxes, the breakdown for which is illustrated in the chart below:

For the 2025 tax year, assuming the same $80,000, the brackets are revised and the tax bill is a bit lower:  

Because of the varying tax brackets, a taxpayer will usually have an effective tax rate different from their highest tax bracket. The [marginal tax rate](https://www.investopedia.com/ask/answers/05/marginaltaxrate.asp) is the additional tax paid for every extra dollar of income. For example, a 10% marginal tax rate means that $.10 of every next dollar earned will be taken as tax.

However, note that while the marginal rate in the example above is 22%, the [effective tax rate](https://www.investopedia.com/terms/e/effectivetaxrate.asp) is 16.1%. This figure is arrived at by dividing the total tax bill ($12,907) by income ($80,000) and multiplying by 100. The effective tax rate corresponds to what the individual ends up paying in taxes to the government.

## How to Reduce Your Taxes: Tax Deductions

There are two ways to pay less tax: make less money or earn more tax benefits. As it’s usually more advantageous to seek out tax benefits, there are several specific places taxpayers can look.

[Tax deductions](https://www.investopedia.com/terms/t/tax-deduction.asp) are legislative enactments that allow a taxpayer to reduce the taxable income used to calculate their tax liability. Tax deductions don’t directly reduce the amount of tax a taxpayer must pay.

For example, consider a taxpayer who contributes to a [traditional IRA](https://www.investopedia.com/terms/t/traditionalira.asp). In many situations, the taxpayer is allowed to deduct their contribution from their taxable income.

Should the taxpayer have contributed the 2024 maximum amount, their taxable income would have been reduced by $7,000. The IRA limits for 2025 [remain the same](https://www.investopedia.com/the-irs-revealed-2025-changes-to-retirement-401k-and-ira-contributions-8738507#:~:text=Friday%2C%20the%20IRS%20announced%20cost,the%20same%20as%20in%202024.).

If the taxpayer was in the 22% marginal tax bracket, this would have resulted in a $1,540 ($7,000 x 22%) tax savings each year.  

### Examples of Tax Deductions

The most common federal tax deduction used to reduce your federal income tax liability is the standard deduction. Each taxpayer may claim a standard deduction based on their filing status. This amount (which is reassessed annually) allows a taxpayer to reduce their taxable income by a set amount established by the federal government.

The alternative to a standard deduction is the itemized deduction. This option allows taxpayers to accumulate certain types of eligible expenses and opt to deduct the total allowable amount of these expenses instead of the standard deduction. These types of expenses include charitable contributions, mortgage interest payments, and medical expenses.

Last, there are deductions exclusive of the standard deduction or itemized deduction. For example, as long as taxpayers meet specific contribution and income limit thresholds, certain types of retirement contributions may be deducted. Alternatively, taxpayers may receive deductions on other types of spending such as educational expenses.

> **Important**
>
> The standard deduction for tax year 2024 is $14,400 for single filers and $29,200 for married couples filing jointly. For the 2025 tax year, the standard deduction is $15,000 for single filers and $30,000 for couples filing jointly.

## How to Reduce Your Taxes: Tax Credits

Certain taxpayers, including parents and low-income earners, are eligible for [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp) that reduce the amount of tax they owe. A tax credit is better than a deduction because it reduces the filer's taxes due dollar for dollar rather than subtracting a percentage of the tax amount owed.

For example, consider a taxpayer who has one child and is therefore eligible for the Child Tax Credit. The taxpayer’s taxable income is $50,000, so the tax liability is $4,500.

The maximum Child Tax Credit for both the 2024 and the 2025 tax years is $2,000, with a cap of $1,700 on the amount that is refundable.

In this example, the credit directly reduces the filer's tax liability from $4,500 to $2,900. The Child Tax Credit is not applied to the $50,000 of taxable income; instead, it is directly applied to the tax liability amount.

The largest tax credits are targeted at specific types of taxpayers. For example, the Earned Income Tax Credit awards tax credits to those with low earned incomes, while the American Opportunity Tax Credit and Lifetime Learning Credit award credits to those pursuing higher education. The Child and Dependent Care Credit benefits those with children/dependents.  

### Refundable vs. Nonrefundable Tax Credits

Some federal tax credits are nonrefundable, meaning once they reduce your tax liability to $0, the taxpayer will not get a refund due to any unused portion of the credit. An example of a nonrefundable tax credit is the Adoption Tax Credit. Once the credit reduces a taxpayer's tax liability to $0, the taxpayer will owe no tax.

Some credits are refundable. In that case, not only can the tax credits reduce a taxpayer's liability to $0 but the taxpayer may get a check for the unused portion of the credit.

For example, if you owe $750 in taxes but qualify for a $1,000 refundable tax credit, you would pay no taxes and receive the remaining $250 as a refund.

## State Income Tax vs. Federal Income Tax

In the U.S., 41 states and the District of Columbia [levy state income taxes](https://www.investopedia.com/state-income-tax-rate-changes-for-this-year-8764186). These are in addition to federal income taxes.

Not all states have [state income taxes](https://www.investopedia.com/terms/state-income-tax.asp). As of 2024, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming don’t have an income tax. New Hampshire taxes dividends and interest income only, but the state will completely phase out these taxes by 2027.

## Individual vs. Other Federal Income Taxes

The information above relates primarily to federal income taxes for individuals. The IRS also collects tax revenue from other entities.

### Business Taxes

Businesses must report income and can receive tax benefits similar to individuals. Certain legal business formations, such as partnerships, have different tax filing dates than individual filers.

In addition, businesses can qualify for a wider range of tax credits. Many of these credits derive from the General Business Credit and are figured using Form 3800.

### Nonprofits

Charities and nonprofits that have received tax-exempt status must file Form 990 with the IRS to maintain their tax-free status. This is an informational return that does not result in any taxes owed by the nonprofit.

However, information provided on the return may result in further evaluation or revocation of the tax-advantaged status.

### Foreign Businesses and Individuals

Individuals or businesses that have income from international sources may be required to file federal taxes.

There are specific rules for foreign entities with income-generating activities within the U.S. and domestic entities with income-generating activities outside the U.S.

## What Are the Federal Income Tax Brackets for 2024 and 2025?

For the 2024 and 2025 tax years, the tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

## Does Social Security Count As Income for Tax Purposes?

Social Security benefits are not counted as gross income. However, benefits are included in your combined income, which the IRS uses to determine if you should pay taxes on your benefits.

Combined income is determined by totaling your [adjusted gross income](https://www.investopedia.com/terms/a/agi.asp) (AGI), nontaxable interest, and half of your Social Security benefits.

If your combined income is between $25,000 and $34,000, you may be taxed on up to 50% of your benefits. If your combined income is more than $34,000, you may be taxed on up to 85% of your benefits.

## Which Country Has the Highest Federal Income Tax?

Ivory Coast has the highest tax rate at 60%. Finland (57.3%), Denmark (55.9%), Japan (55.95%), Austria (55%), Sweden (52%), Aruba (52%), Belgium (50%), Israel (50%), and the Netherlands (49.5%) round out the top 10 as of 2023.

## Which U.S. President Imposed the First Federal Income Tax?

President Abraham Lincoln imposed the first federal income tax by signing the Revenue Act on Aug. 5, 1861. A 3% tax was imposed on all annual incomes over $800. The purpose was to finance the Civil War.

## When Is Federal Income Tax Due?

Generally, federal income tax is due on April 15 of every year. The day shifts to the following business day if April 15 falls on a weekend. In an emergency such as the COVID-19 crisis, the date can be delayed.

## The Bottom Line

The federal income tax system in the U.S. is a progressive tax applied to all forms of earnings that make up a taxpayer's taxable income, including earned and unearned income.

Each year, the IRS releases updates to the tax brackets and rates that apply to single filers, married individuals filing separately or jointly, and heads of households.

_**Correction—March 13, 2025**:_ The 2024 tax brackets have been corrected.  

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