US Federal Income Taxes
The United States has a federal income tax system administered by the Internal Revenue Service (IRS). Most Americans must file an annual tax return (Form 1040) by April 15 each year, reporting income earned in the previous calendar year. Understanding how the tax system works can save you thousands of dollars annually.
The Progressive Tax System
The US uses a progressive (marginal) tax system — higher income is taxed at higher rates, but only the income within each bracket is taxed at that rate. Many people misunderstand this: moving into a higher bracket does not mean all your income gets taxed at the higher rate.
2024 Federal Income Tax Brackets (Single Filers)
| Taxable Income | Marginal Rate |
|---|---|
| $0 – $11,600 | 10% |
| $11,601 – $47,150 | 12% |
| $47,151 – $100,525 | 22% |
| $100,526 – $191,950 | 24% |
| $191,951 – $243,725 | 32% |
| $243,726 – $609,350 | 35% |
| Over $609,350 | 37% |
Example: A single filer with $60,000 of taxable income pays:
- 10% on first $11,600 = $1,160
- 12% on $11,601–$47,150 = $4,266
- 22% on $47,151–$60,000 = $2,827
- Total federal tax = $8,253 (effective rate ≈ 13.8%, marginal rate = 22%)
2024 Brackets — Married Filing Jointly
| Taxable Income | Marginal Rate |
|---|---|
| $0 – $23,200 | 10% |
| $23,201 – $94,300 | 12% |
| $94,301 – $201,050 | 22% |
| $201,051 – $383,900 | 24% |
| $383,901 – $487,450 | 32% |
| $487,451 – $731,200 | 35% |
| Over $731,200 | 37% |
Types of Income
Not all income is taxed the same way:
| Income Type | Tax Treatment |
|---|---|
| Ordinary income (wages, salary, freelance, interest, short-term capital gains) | Taxed at marginal rates (10%–37%) |
| Long-term capital gains (assets held > 1 year) | 0%, 15%, or 20% depending on income |
| Qualified dividends | Same as long-term capital gains rates |
| Social Security benefits | 0–85% taxable depending on combined income |
| Roth IRA qualified distributions | Tax-free |
| Inheritances (most cases) | Not federally taxable to recipient (estate pays estate tax if over threshold) |
Long-term capital gains rates (2024):
- 0%: Income up to $47,025 (single) / $94,050 (MFJ)
- 15%: $47,025–$518,900 (single) / $94,050–$583,750 (MFJ)
- 20%: Above those thresholds
This is why long-term investing is tax-efficient: a $10,000 gain on a stock held 13 months may be taxed at 15%, while the same gain on a stock held 11 months is taxed at your ordinary rate (possibly 22–37%).
Gross Income → Taxable Income
Gross Income (all income)
− Above-the-line deductions (adjustments to income)
= Adjusted Gross Income (AGI)
− Standard deduction OR itemized deductions
− Qualified Business Income (QBI) deduction if applicable
= Taxable Income
× Tax brackets
= Tax owed
− Tax credits
= Net tax liability
− Taxes already withheld (W-2 withholding, estimated payments)
= Refund or amount owed
Above-the-Line Deductions (Adjustments to AGI)
These reduce your AGI regardless of whether you itemize:
| Deduction | 2024 Limit / Rule |
|---|---|
| Traditional IRA contributions | Up to $7,000; deductibility depends on income + workplace plan coverage |
| Student loan interest | Up to $2,500; phases out at $80,000–$95,000 MAGI (single) |
| HSA contributions | Up to $4,150 (self-only) / $8,300 (family) |
| Self-employment tax (half) | Deduct half of SE tax you paid |
| Self-employed health insurance premiums | 100% deductible |
| Alimony (pre-2019 divorce) | Deductible for payer; taxable for recipient |
Standard Deduction vs. Itemizing
After calculating AGI, you subtract either the standard deduction or your itemized deductions — whichever is greater.
2024 Standard Deduction:
- Single: $14,600
- Married Filing Jointly: $29,200
- Head of Household: $21,900
- Add $1,950 (single) / $1,550 (per spouse, MFJ) if age 65+ or blind
Itemized deductions (Schedule A):
- State and local taxes (SALT) — capped at $10,000
- Mortgage interest (up to $750,000 of loan principal for loans after Dec. 15, 2017)
- Charitable contributions (cash: up to 60% of AGI; appreciated stock: up to 30%)
- Medical expenses exceeding 7.5% of AGI
- Casualty losses (only federally declared disaster areas)
When to itemize: Only if your itemized total exceeds the standard deduction. After the 2017 Tax Cuts and Jobs Act doubled the standard deduction, ~90% of Americans now take the standard deduction.
FICA Taxes (Payroll Taxes)
These fund Social Security and Medicare. They appear as separate line items on your W-2:
| Tax | Rate (Employee) | Wage Base |
|---|---|---|
| Social Security | 6.2% | $168,600 (2024) |
| Medicare | 1.45% | Unlimited |
| Additional Medicare | 0.9% | Wages over $200,000 (single) / $250,000 (MFJ) |
Employers pay a matching 6.2% + 1.45%. Self-employed pay both sides (15.3% total on net self-employment income), but can deduct half.
Tax Credits
Credits reduce tax owed dollar-for-dollar — more valuable than deductions (which only reduce taxable income).
| Credit | Amount | Refundable? |
|---|---|---|
| Child Tax Credit | $2,000 per child under 17; up to $1,700 refundable (ACTC) | Partially |
| Earned Income Tax Credit (EITC) | Up to $7,830 (3+ children, 2024) | Yes — refundable |
| Child and Dependent Care Credit | 20–35% of up to $3,000/$6,000 in expenses | Partially |
| American Opportunity Credit (education) | Up to $2,500 per student, first 4 years of college | 40% refundable |
| Lifetime Learning Credit | Up to $2,000 per return (20% of first $10,000) | No |
| Saver's Credit | 10–50% of retirement contributions, up to $2,000/$4,000 | No |
| Premium Tax Credit (ACA) | Subsidises health insurance bought on exchange | Yes |
| EV Tax Credit | Up to $7,500 for new qualifying electric vehicles | No |
Refundable credit: If the credit exceeds your tax owed, you get the excess as a refund. Non-refundable: Can only reduce tax owed to $0.
Filing Status
Filing status significantly affects brackets, standard deduction, and many credits:
| Status | Who qualifies |
|---|---|
| Single | Unmarried or legally separated |
| Married Filing Jointly (MFJ) | Married couples filing together — usually most advantageous |
| Married Filing Separately (MFS) | Married but filing separate returns — usually disadvantageous; required in some cases |
| Head of Household (HOH) | Unmarried + paid > 50% of home costs + qualifying dependent lived with you > 6 months |
| Qualifying Surviving Spouse | Widowed in prior 2 years + qualifying dependent child |
Key Tax Documents
| Form | What it shows |
|---|---|
| W-2 | Wages and taxes withheld by employer; received by Jan. 31 |
| 1099-NEC | Non-employee compensation (freelance, contract work) |
| 1099-INT | Interest income from bank accounts |
| 1099-DIV | Dividend income |
| 1099-B | Proceeds from broker sales (stocks, ETFs) |
| 1098 | Mortgage interest paid |
| 1095-A | Health insurance marketplace statement (for ACA premium tax credit) |
| Schedule K-1 | Partnership, S-corp, or trust income/loss |
Self-Employment Taxes
Freelancers, gig workers (Uber, DoorDash, Fiverr, Upwork), and sole proprietors must:
- Pay self-employment tax: 15.3% on net self-employment income (up to SS wage base)
- Make quarterly estimated payments: Due April 15, June 15, Sept. 15, Jan. 15 — underpayment triggers a penalty
- Deduct business expenses: Home office, equipment, internet, health insurance, half of SE tax
- Consider setting up an S-corp: At higher income levels, paying yourself a reasonable salary (subject to FICA) and taking the remainder as a distribution (not subject to SE tax) can save significant money
Common Tax-Minimization Strategies
| Strategy | How it saves taxes |
|---|---|
| Max out 401(k) | Reduces taxable income by up to $23,000 |
| Contribute to HSA | Triple tax advantage — deductible, grows tax-free, withdraws tax-free for healthcare |
| Tax-loss harvesting | Sell losing investments to offset capital gains |
| Charitable giving of appreciated stock | Deduct FMV, avoid capital gains tax |
| Backdoor Roth IRA | Access Roth tax-free growth above income limits |
| Bunching deductions | Concentrate charitable gifts in alternate years to clear standard deduction threshold |
| Qualified Opportunity Zone investing | Defer and reduce capital gains by investing in designated low-income areas |
Study Snapshot
US Federal Taxes — progressive marginal rates, above-the-line deductions, standard vs. itemized, FICA, credits (child, EITC, education), filing status, and key tax-minimisation strategies.
Concept Flow
Check Your Understanding
- If you earn $60,000 and your marginal rate is 22%, does that mean you pay 22% on all $60,000? Why or why not?
- What is the SALT cap and which deduction category does it affect?
- Why are long-term capital gains taxed at lower rates than ordinary income?
- What is the difference between a refundable and non-refundable tax credit?
What to Review Next
- Self-employment taxes and quarterly estimated payments
- State income taxes (California, Texas, Florida — how they differ)
- Tax-advantaged accounts: HSA, 529 plans, FSAs