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Income Tax Basics

Your Guide to Federal Income Taxes in the United States

For most Americans, the thought of paying income taxes is stressful and unpleasant. While everyone knows that individual income taxes are paid to the IRS (Internal Revenue Service) each year, the process of taxation itself can be confusing to many. There are various factors that affect how personal income is taxed and how much you end up paying to the government, and possibly receiving back as a tax refund.

Above all else, it is important to understand that nearly everybody is required to pay income taxes in order to comply with the law. The United States government needs a lot of money to function, and the funds that are collected from income taxes are meant to finance the military, infrastructure, and public services. Both individuals and companies are required to pay a portion of their income to the federal government. There are very few groups who are exempt from paying income taxes and filing an annual tax return.

While the federal government is responsible for constructing and implementing tax laws, the IRS is in charge of enforcing those tax laws to make sure that everybody is paying the proper amount. Tax forms are available for download online, or paper forms may be requested for pick-up. The IRS also provides assistance to taxpayers who have questions, concerns, or issues with their tax situation.

Federal Income Tax Rates & Brackets

Currently, the United States has a progressive income tax system. That basically means that individuals who earn more money generally pay more in taxes. The amount of tax that you owe each year is based on your income level – hence the name, income tax. Your adjusted gross income (AGI) determines which marginal tax bracket you fall into, and thus, which tax rate applies to you.

The federal income tax brackets are broken down into 7 levels of taxable income, corresponding with your filing status. The tax rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%. It’s important to note that moving up into a higher tax bracket does not mean that all of your income will be taxed at the higher rate. In actuality, only the money that is earned within a particular bracket is subject to the corresponding tax rate.

For more information, see 2019 Federal Tax Rates, Personal Exemptions, and Standard Deductions.

Withholding Tax

The majority of individuals are subject to the ‘Pay-As-You-Go’ system, which means that income tax is deducted from each paycheck and sent to the IRS. If more money was withheld from your wages than you owe in taxes that year, you will receive the overpayment as a tax refund. On the other hand, if too little was withheld from your wages, you will owe more to the IRS on April 15th.

For more information, see Federal Withholding Tax.

Estimated Taxes

If you are self-employed, the IRS expects you to pay Estimated Income Tax on a quarterly basis (typically in equal installments every 3 months). At the end of the year, if your payments were not enough to cover the total income tax due, you must pay the rest to the IRS. And also like other taxpayers, if you paid too much over the course of the year (more than what you owe in income tax), the IRS will send back your excess payment in the form of a tax refund.

For more information, see What Is Estimated Tax & Who Does It Apply To?

Tax Credits & Tax Deductions

Fortunately, the IRS allows people to reduce their tax liability using various breaks, including tax credits and tax deductions.

Tax credits reduce your tax liability dollar-for-dollar, which means that a $1,000 tax credit actually saves you $1,000 in taxes. On the other hand, tax deductions reduce the amount of your taxable income (i.e. the income you earned that is subject to taxation). Both types of tax breaks can be very helpful in lowering your tax bill.

While lawmakers are constantly debating on whether or not the United States should shift to less complicated, or even a ‘flat rate,’ income tax system, there is little reason to believe that will be implemented anytime soon.

Click HERE to file your income taxes online.


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