What Is Federal Income Tax?

The U.S. federal income tax is a tax levied by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. Federal income taxes apply to all forms of earnings that make up a taxpayer's taxable income, including wages, salaries, commissions, bonuses, tips, investment income, and certain types of unearned income.

In the U.S., federal income tax rates for individuals are progressive, meaning that as taxable income increases, so does the tax rate. Federal income tax rates range from 10% to 37% and kick in at specific income thresholds. The income ranges the rates apply to are called tax brackets. Income that falls within each bracket is taxed at the corresponding rate.

The federal corporate tax rate is a flat 21% (reduced from 35% by the Tax Cuts and Jobs Act, passed into law at the end of 2017).

Key Takeaways

  • The federal income tax is the largest source of revenue for the U.S. government.
  • Federal income tax is used for various expenses ranging from building and repairing the country's infrastructure to improving education and public transportation and providing disaster relief.
  • Federal income taxes are based on your income and filing status; the same federal tax rates apply to everyone, regardless of where they live or work.
  • Federal income taxes are collected by the federal government, while state income taxes are collected by the individual state(s) in which a taxpayer lives and earns income.
  • Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income taxes.

How Federal Income Tax Works

Tax is collected from individuals and corporations by the city, state, or country where they reside or operate. When the tax collected is credited to the country's government, it is referred to as a federal tax.

Governments use the money collected through federal taxes to pay for the growth and upkeep of the country. Some look at federal tax as “rent” charged to live in a country or the fee to use the resources provided by a country. When you pay tax to the U.S. government, you’re in effect investing in your economy, as the government uses the funds to do the following:

  • Build, repair, and maintain infrastructure
  • Fund the pensions and benefits of government workers
  • Fund Social Security programs
  • Fund major health programs, including Medicare, Medicaid, CHIP, and marketplace subsidies
  • Fund "safety net" programs to assist lower-income households
  • Fund defense and international security programs
  • Improve sectors such as education, health, agriculture, utilities, and public transportation
  • Embark on new feats such as space exploration
  • Provide emergency disaster relief

In 2021, the U.S. government collected $4.05 trillion in revenue and spent $6.82 trillion, resulting in a $2.77 trillion deficit.

The largest source of revenue for the federal government comes from the income of its residents. In 2020, the IRS collected nearly $3.5 trillion in receipts, of which individuals, estates, and trusts contributed $1.87 trillion. Meanwhile, business income taxes accounted for about $264 billion.

Special Considerations

Workers receive their earnings either as net income (NI), also known as take-home pay, or gross income (or gross pay). Net income is the total amount received after taxes, benefits, and voluntary contributions are deducted from the paycheck. When taxes are withheld, it means the company or payer has paid the tax to the government on the worker’s behalf. Gross income includes the total amount of income, and the worker must pay the government what is owed.

While canceled debts are usually taxable, Paycheck Protection Program (PPP) loans provided during the COVID-19 pandemic are exempt from federal taxation. Still, some states treat the forgiven amount as taxable income or deny deductions for expenses paid for by the loan—or both. Loans that were represented by the taxpayer as being exempt but were factually not exempt and as such did not qualify for forgiveness, will be treated as gross income.

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, 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.

Federal Income Tax Brackets

The federal income tax is built on a progressive tax system, where higher income earners are taxed at higher rates. The table below shows the tax brackets and rates for 2021:

2021 Tax Brackets and Rates
2021 Tax Rate Single Filers Married Filing Jointly Heads of Households
10% Up to $9,950 Up to $19,900 Up to $14,200
12%  $9,951 to $40,525 $19,901 to $81,050 $14,201 to $54,200
22%  $40,526 to $86,375 $81,051 to $172,750 $54,201 to $86,350
24%  $86,376 to $164,925 $172,751 to $329,850 $86,351 to $164,900
32%  $164,926 to $209,425 $329,851 to $418,850 $164,901 to $209,400
35%  $209,426 to $523,600 $418,851 to $628,300 $209,401 to $523,600
37%  $523,601 or more $628,301 or more $523,601 or more

For 2022, the same tax rates apply, but the income brackets increase slightly:

2022 Tax Brackets and Rates
2022 Tax Rate Single Filers Married Filing Jointly Heads of Households
10% $0 to $10,275 $0 to $20,550 $0 to $14,650
12%  $10,275 to $41,775 $20,550 to $83,550 $14,650 to $55,900
22%  $41,775 to $89,075 $83,550 to $178,150 $55,900 to $89,050
24%  $89,075 to $170,050 $178,150 to $340,100 $89,050 to $170,050
32%  $170,050 to $215,950 $340,100 to $431,900 $170,050 to $215,950
35%  $215,950 to $539,900 $431,900 to $647,850 $215,950 to $539,900
37%  $539,900 or more $647,850 or more $539,900 or more

The marginal tax rate is the additional tax paid for every extra (or "next") dollar of income. For example, a 10% marginal tax rate means that 10 cents of every next dollar earned will be taken as tax.

An individual who is unmarried and earns $80,000 annually falls into the 22% marginal tax bracket. This means the taxpayer would be responsible for $13,223 in taxes (for 2021), the breakdown for which is illustrated in the chart below.

Dollars Amount Subject to Tax Tax Rate Tax at Each Rate
$0~$9,950 $9,950 10% $995
$9,950~$41,775 $31,825 12% $3,819
$41,775~$80,000 $38,225 22% $8,409
Total $80,000 - $13,223 tax bill

However, note that while the marginal rate is 22%, the effective tax rate is 16.5%. This figure is arrived at by dividing the total tax bill ($13,223) by income ($80,000) and multiplying by 100. The effective tax rate is the actual rate the individual ends up paying in taxes to the government.

State Income Tax vs. Federal Income Tax

It is important to distinguish between the general notion of income tax and federal income tax. In the U.S., governments at the state level may also levy income taxes in addition to federal income taxes.

Not all states have state-level income taxes. Currently, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, 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.

What Are the Federal Income Tax Brackets for 2021 and 2022?

The U.S. federal income tax is a marginal tax rate system based on an individual's income and filing status. For the 2021 and 2022 tax years, the tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Does Social Security Count as Income?

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 (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?

The Ivory Coast has the highest tax rate at 60%. Finland (56.95%), Japan (55.97), Denmark (55.9), Austria (55), Sweden (52.9%), Aruba (52%), Belgium (50%), Israel (50%), and Slovenia (50%) round out the top 10.

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

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

When Is Federal Income Tax Due?

Generally, federal income tax is due on April 15 of every year. The day can shift slightly if April 15 falls on a weekend or because of other factors.

Article Sources
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