Common Tax Questions & Answers

Frequently Asked Questions About Federal Income Taxes and the IRS

Here are easy-to-understand answers to the top tax questions that are most often asked by people. These FAQs cover the basics of income tax, claiming tax breaks, and filing an annual tax return with the Internal Revenue Service (IRS).

What Are the U.S. Income Tax Rates for Individuals?

For tax year 2020, there are seven federal income tax rates ranging from 10% to 37%. You are taxed based on your filing status and annual income. The United States has a progressive tax system, which means that the tax rates increase with income levels. High-income earners are held responsible for a much larger share of the country’s tax burden than low- and middle-income taxpayers.

Here is a table of the federal tax rates for 2020:

 

Tax Rate	Single Filers, with Taxable Income Over:	Married Couples Filing Jointly, with Taxable Income Over:	Heads of Household, with Taxable Income over:
10%	$0	$0	$0
12%	$9,875	$19,750	$14,100
22%	$40,125	$80,250	$53,700
24%	$85,525	$171,050	$85,500
32%	$163,300	$326,600	$163,300
35%	$207,350	$414,700	$207,350
37%	$518,400	$622,050	$518,400

 

RELATED: 2019 Federal Tax Rates & Standard Deductions

How Do Tax Brackets Work?

Tax brackets refer to the range of incomes that are taxed at a given rate. The tax brackets vary depending on your filing status (see below). Essentially, your marginal income tax bracket represents the highest tax rate that you need to pay on your income.

There are seven tax brackets for each filing status: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The amount of income that you earn each year determines which tax bracket(s) you fall into.

It is important to note, however, that all of your income isn’t taxed at the highest rate that applies to you. Only the income you earn within a certain bracket is taxed at that rate.

RELATED: How to Determine Your Income Tax Bracket

What Are the Filing Statuses for Individual Income Tax?

There are currently five filing statuses available for calculating income tax liability and filing a tax return. They are: single, married filing jointly, married filing separately, head of household, and qualifying widow/widower with dependent child (which allows a taxpayer to use the same tax rates as those who are married filing jointly).

You should review each filing status and make sure to use the one that applies best to your situation. If you qualify for more than one filing status, you can choose the status that offers you the most tax benefits.

RELATED: How to Determine Your Filing Status

What’s the Difference Between Tax Deductions and Tax Credits?

Both tax deductions and tax credits are types of tax breaks that you can claim on your income tax return to lower your tax liability. However, they are calculated differently so it’s important to understand the distinctions between them.

Tax deductions are used to lower your taxable income (i.e. the amount of income you earned that is subject to tax). Tax deductions are equal to the percentage of your marginal tax bracket (see above). For example, if you are in the 24% tax bracket, a $1,000 deduction will have you $240 in tax (because 0.24 x $1,000 = $240).

Tax credits, on the other hand, are used to lower your tax liability (i.e. the amount of tax that you owe the IRS). Tax credits represent a dollar-for-dollar reduction of your tax due. For example, a $1,000 credit will save you $1,000 in tax. As you can see, a $1,000 tax credit is worth much more than a $1,000 tax deduction.

RELATED: Tax Credits vs. Tax Deductions

What’s the Difference Between the Standard Deduction and Itemized Deductions?

When it comes to income tax, there are two main types of tax deductions: the standard deduction and itemized deductions. You may claim one or the other, but not both, on your annual tax return. Generally, it’s recommended that you claim whichever type of deduction results in the lowest tax for you.

The standard deduction is based on your filing status (see above) and it’s usually adjusted for inflation each year. The standard deduction is subtracted from your adjusted gross income (AGI), thus reducing the amount of income that is subject to tax.

Alternatively, itemized deductions may be claimed instead of using the standard deduction. Itemized deductions include certain expenses that you paid during the year (such as mortgage interest, charitable donations, and medical expenses) that can be used to lower your taxable income.

RELATED: The Standard Deduction vs. Itemized Deductions

What’s the Difference Between Refundable Tax Credits and Non-Refundable Tax Credits?

In general, most tax credits are nonrefundable. This means they can reduce your tax liability to zero, but no further than that. For example, let’s say your tax liability is $1,500 and you’re eligible for a $2,000 nonrefundable tax credit – that means you will owe $0 in taxes, but you will not get a $500 refund for the amount you didn’t use.

On the other hand, refundable tax credits actually can reduce your tax liability to below zero and result in a tax refund for you. For example, if your tax liability is $1,500 and you qualify for a $2,000 refundable tax credit, you will owe $0 in taxes and you will receive a $500 tax refund.

RELATED: Refundable vs. Non-Refundable Tax Credits

How Is Tax Liability Calculated?

Your tax liability (i.e. the amount you owe the IRS each year) is calculated using the information outlined in the above FAQs. First, you must determine your filing status and income level. Next, your tax liability is calculated using the tax rate(s) that apply to you, as well as any tax deductions and/or tax credits that you’re eligible for.

RELATED: Income Tax Basics

Who Has to File an Income Tax Return?

While most Americans are expected to file a federal tax return each year, there are some people who are not required to file. Whether or not you need to file depends on your filing status and income level. In general, you don’t need to file an income tax return if your total income for the year is below a certain threshold.

The IRS provides an online tool – Do I Need to File a Tax Return? – to help people determine if they’re required to file a federal tax return. To use this tool, you will need to know your filing status, federal income tax withheld, and some other basic information to figure your gross income.

RELATED: All Taxpayers File Form 1040 (Form 1040A & 1040EZ No Longer Used)

How Do I File an Income Tax Return?

There are several options for filing your federal tax return. You can file electronically (a.k.a. e-filing) using an online software program, fill out a paper tax return and mail it to the IRS, or hire a tax professional to prepare and file your taxes for you.

E-filing is considered to be the fastest and most convenient method. Just make sure you use an IRS-certified e-file provider to prepare/submit your tax return. For more information, see the File Taxes Online center.

RELATED: How to File Your Federal Income Tax Return

What’s the Difference Between Federal Income Tax and State Income Tax?

Federal income tax is administered by the IRS, a federal agency, and essentially applies to all people living/working in the United States. On the other hand, state income taxes are administered by each separate state tax authority and apply to people who are living/working in that particular state.

There are currently seven states that do not impose a state income tax on individuals. These states are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Additionally, there are two states that also have no tax on earned income but do impose tax on investment income – they are New Hampshire and Tennessee.

RELATED: State Income Tax vs. Federal Income Tax

---