The U.S. federal income tax is a progressive tax system, meaning the more you earn, the higher percentage you pay. Understanding how your income is taxed can help you make more informed financial decisions.
How Federal Income Tax Works
Progressive Tax Brackets
The U.S. tax system uses marginal tax rates, which means you pay different rates on different portions of your income. Your income is divided into "brackets," with each bracket taxed at a specific rate.
Income Tax Calculation Steps
1. Calculate Your Total Income
Add up all sources of income, including:
- Wages and salary
- Self-employment income
- Interest and dividends
- Rental income
- Capital gains
- Retirement distributions
2. Apply Deductions
Deductions reduce your taxable income. You can choose either:
- Standard Deduction: A fixed amount based on your filing status that requires no documentation.
- Itemized Deductions: Sum of eligible expenses like mortgage interest, charitable donations, medical expenses, and state/local taxes (subject to limits).
2023 Standard Deduction Amounts
- Single: $13,850
- Married Filing Jointly: $27,700
- Married Filing Separately: $13,850
- Head of Household: $20,800
3. Calculate Taxable Income
Taxable Income = Total Income - Deductions
4. Calculate Tax Using Tax Brackets
Your taxable income is taxed progressively through the brackets.
2023 Federal Income Tax Brackets
Single Filers
| Taxable Income | Tax Rate |
|---|---|
| $0 to $11,000 | 10% |
| $11,001 to $44,725 | 12% |
| $44,726 to $95,375 | 22% |
| $95,376 to $182,100 | 24% |
| $182,101 to $231,250 | 32% |
| $231,251 to $578,125 | 35% |
| $578,126 or more | 37% |
Married Filing Jointly
| Taxable Income | Tax Rate |
|---|---|
| $0 to $22,000 | 10% |
| $22,001 to $89,450 | 12% |
| $89,451 to $190,750 | 22% |
| $190,751 to $364,200 | 24% |
| $364,201 to $462,500 | 32% |
| $462,501 to $693,750 | 35% |
| $693,751 or more | 37% |
5. Apply Tax Credits
Tax credits reduce your tax liability directly, dollar for dollar. Common credits include:
- Child Tax Credit
- Earned Income Tax Credit
- American Opportunity Credit (education)
- Lifetime Learning Credit
- Child and Dependent Care Credit
6. Determine Tax Due or Refund
Tax Due/Refund = Total Tax Liability - Tax Payments/Withholding
Tax Planning Strategies
1. Maximize Pre-Tax Contributions
Contributing to retirement accounts like 401(k)s and traditional IRAs can reduce your taxable income.
2. Time Income and Deductions
Consider timing large income events or deductible expenses to optimize your tax situation across tax years.
3. Harvest Investment Losses
Strategically selling investments at a loss can offset capital gains and reduce your taxable income.
4. Consider Filing Status
Your filing status significantly impacts your tax liability. Married couples should compare filing jointly versus separately.
5. Stay Informed About Tax Credits
Tax credits can significantly reduce your tax bill, so be sure you're claiming all credits you're eligible for.
Important Note
This calculator provides estimates based on federal income tax rates and standard rules. Your actual tax situation may differ based on specific circumstances. For personalized tax advice, consult a tax professional.