Federal Income Tax is a tax levied by the U.S. federal government on the annual earnings of individuals, corporations, trusts, and other legal entities. Administered by the Internal Revenue Service (IRS), federal income tax represents the largest source of revenue for the federal government, funding national defense, social programs, infrastructure, government operations, and federal services. This tax applies to income from various sources including wages, salaries, business profits, investments, rental income, and other earnings.
The federal income tax system uses a progressive tax structure with seven tax brackets ranging from 10% to 37% (as of 2024). Under this progressive system, higher portions of income are taxed at increasingly higher rates as income rises, though only the income within each bracket is taxed at that bracket’s rate, not your entire income. This structure means higher earners pay a larger percentage of their income in taxes compared to lower earners.
Federal income tax calculation begins with gross income, which includes all taxable income from any source. From gross income, you subtract adjustments to income (such as IRA contributions and student loan interest) to arrive at adjusted gross income (AGI). You then subtract either the standard deduction or itemized deductions to determine taxable income. Tax liability is calculated by applying the appropriate tax rates to your taxable income, then subtracting any tax credits you qualify for, resulting in your final tax owed or refund due.
Most employees pay federal income tax through withholding, where employers deduct estimated tax from each paycheck and remit it to the IRS. Self-employed individuals and others without withholding typically make quarterly estimated tax payments. At year-end, taxpayers file Form 1040 to reconcile amounts paid throughout the year with actual tax liability, resulting in either a refund if too much was paid or a balance due if insufficient tax was withheld or paid.
Federal income tax differs from other federal taxes including Social Security and Medicare taxes (payroll taxes), federal excise taxes, estate and gift taxes, and should not be confused with state income taxes, which are separate obligations to state governments.
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