What Is Federal Income Tax? Definition and Tax Brackets and Rates

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What Is Federal Income Tax? Definition and Tax Brackets and Rates

What Is Federal Income Tax?

The Internal Revenue Service (IRS) levies a tax on the yearly profits of individuals, businesses, trusts, and other legal organizations in the United States. Wages, salaries, commissions, bonuses, gratuities, investment income, and some kinds of unearned income are all subject to federal income taxes as part of a taxpayer’s taxable income.

Individual federal income tax rates in the United States are progressive, which means that as taxable income rises, so does the tax rate. Federal income tax rates vary from 10% to 37% and are levied at various income levels. Tax brackets are the income levels to which the rates apply. Income in each tax group is taxed at the associated rate.

The federal corporation tax rate is a flat 21% (down from 35% under the Tax Cuts and Jobs Act, which was enacted at the end of 2017).

Key Takeaways

  • The federal income tax is the primary source of revenue for the United States government.
  • The federal income tax is utilized for a variety of purposes, including the construction and maintenance of the country’s infrastructure, the improvement of education and public transit, and disaster assistance.
  • Income and filing status are used to calculate federal income taxes; the same federal tax rates apply to everyone, regardless of where they reside or work.
  • The federal government collects federal income taxes, while state income taxes are collected by the specific state(s) in which a taxpayer resides and earns money.
  • There are no state income taxes in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming.

How Federal Income Tax Works

Individuals and companies pay taxes to the city, state, or nation in which they live or operate. A federal tax is one that is collected and credited to the government of the nation.

Governments utilize the money generated via federal taxes to fund the country’s development and maintenance. Some consider federal tax to be “rent” paid to reside in a nation or a price paid to utilize a country’s resources. When you pay taxes to the United States government, you are effectively investing in your economy since the monies are used to perform the following:

  • Infrastructure construction, maintenance, and upkeep
  • Pay for government employees’ pensions and perks.
  • Fund Social Security programs
  • Fund key health-care programs such as Medicare, Medicaid, CHIP, and market-based subsidies.
  • Support “safety net” initiatives for low-income families.
  • Defense and foreign security projects should be funded.
  • Enhance education, health, agriculture, utilities, and public transportation.
  • Take on new challenges, such as space exploration.
  • Provide immediate catastrophe relief
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The United States earned $4.05 trillion in income and spent $6.82 trillion, resulting in a $2.77 trillion deficit in 2021.

The federal government’s primary source of money is the income of its citizens. In 2021, the IRS received over $4.1 trillion in revenues, $2.3 trillion of which came from individuals, estates, and trusts. Meanwhile, company income taxes were $419 billion.

Special Considerations

Workers are paid either as net income (NI), commonly known as take-home pay, or as gross income (or gross pay).The entire amount earned after taxes, perks, and voluntary contributions are subtracted from the paycheck is referred to as net income. When taxes are withheld, it signifies that the employer or payer has paid the tax to the government on behalf of the employee. The complete amount of money is included in gross income, and the worker must pay the government what is owing.

While canceled debts are typically taxable, Paycheck Protection Program (PPP) loans made during the COVID-19 epidemic are not. Nonetheless, some jurisdictions classify the forgiven sum as taxable income or restrict deductions for loan-paid expenses—or both. Loans that were reported as exempt by the taxpayer but were not exempt in actuality and hence did not qualify for forgiveness will be taxed as gross income.

The amount your employer withholds for taxes is determined by your earnings and the information you provided on Form W-4. For federal tax purposes, any money generated, whether as a wage, salary, cash gift from an employer, business revenue, gratuities, casino income, bonuses, or unemployment compensation, is considered income.

Federal Income Tax Brackets

The federal income tax is based on a progressive tax structure, which means that higher income earners pay a greater tax rate. The following table lists the tax brackets and rates for 2021:

2021 Tax Brackets and Rates
2021 Tax RateSingle FilersMarried Filing JointlyHeads of Households
10%Upto $9,950Upto $19,900Upto $14,200
12%$9,951 to $40,525$19,901 to $81,050$14,201 to $54,200
22%$40,526 to $86,375$81,051 to $172,750$54,201 to $86,350
24%$86,376 to $164,925$172,751 to $329,850$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,901 to $209,400
35%$209,426 to $523,600$418,851 to $628,300$209,401 to $523,600
37%$523,601 or more$628,301 or more$523,601 or more

The same tax rates apply in 2022, however the income bands rise slightly:

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2022 Tax Brackets and Rates
2022 Tax RateSingle FilersMarried Filing JointlyHeads of Households
10%$0 to $10,275$0 to $20,550$0 to $14,650
12%$10,275 to $41,775$20,550 to $83,550$14,650 to $55,900
22%$41,775 to $89,075$83,550 to $178,150$55,900 to $89,050
24%$89,075 to $170,050$178,150 to $340,100$89,050 to $170,050
32%$170,050 to $215,950$340,100 to $431,900$170,050 to $215,950
35%$215,950 to $539,900$431,900 to $647,850$215,950 to $539,900
37%$539,900 or more$647,850 or more$539,900 or more

The marginal tax rate is the amount of additional tax paid for each additional (or “next”) dollar of income. A 10% marginal tax rate, for example, indicates that 10% of the following dollar generated is taxed.

An single person earning $80,000 per year falls into the 22% marginal tax band. This indicates that the taxpayer would be accountable for $13,223 in taxes (for 2021), as shown in the chart below.

DollarsAmount Subject to TaxTax RateTax at Each Rate
$0~$9,950$9,95010%$995
$9,950~$41,775$31,82512%$3,819
$41,775~$80,000$38,22522%$8,409
Total$80,000$13,223 tax bill

It should be noted, however, that although the marginal rate is 22%, the effective tax rate is 16.5%. This number is calculated by dividing the total tax bill ($13,223) by the amount earned ($80,000) and multiplying by 100. The effective tax rate is the actual rate at which a person pays taxes to the government.

State Income Tax vs. Federal Income Tax

It is critical to differentiate between the broad concept of income tax and federal income tax. In the United States, in addition to federal income taxes, state governments may collect income taxes.

State income taxes do not exist in every state. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming currently do not have an income tax. New Hampshire solely taxes dividends and interest income, but the state plans to phase out these taxes entirely by 2027.

What Are the Federal Income Tax Brackets for 2021 and 2022?

The federal income tax in the United States is a marginal tax rate system depending on an individual’s income and filing status. The tax brackets for the 2021 and 2022 tax years are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Does Social Security Count as Income?

Social Security payouts are not included in the calculation of gross income. Benefits, on the other hand, are included in your total income, which the IRS evaluates to decide whether you should pay taxes on your benefits. Combined income is calculated by adding your AGI, nontaxable interest, and half of your Social Security payments. You may be taxed on up to 50% of your benefits if your total income is between $25,000 and $34,000. If your total income exceeds $34,000, you may be required to pay taxes on up to 85% of your benefits.

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Which Country Has the Highest Federal Income Tax?

The Ivory Coast has the highest tax rate in the world, at 60%. Finland (56.95%), Japan (55.97%), Denmark (55.9), Austria (55), Sweden (52.9%), Aruba (52%), Belgium (50%), Israel (50%), and Slovenia (50%).

Which U.S. President Imposed the First Federal Income Tax?

On August 5, 1861, President Abraham Lincoln signed the Revenue Act, which established the first federal income tax. He did it in order to fund the Civil War. All yearly earnings above $800 were subject to a 3% tax.

When Is Federal Income Tax Due?

In most cases, federal income tax is payable on April 15 of each year. The date may change somewhat if April 15 occurs on a weekend or for other reasons.

Investopedia asks authors to back their work with original sources. White documents, government statistics, original reporting, and interviews with industry experts are among them. Where necessary, we also cite original research from other credible publications. You can read more about the guidelines we use to provide accurate, balanced material on our website.

editorial policy.
  1. Internal Revenue Service. “Information About Federal Taxes.”

  2. Internal Revenue Service. “What is Taxable and Nontaxable Income?”

  3. The Tax Foundation. “Progressive Tax.”

  4. U.S. Congress. “H.R.1 – An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018: Summary.”

  5. The Tax Foundation. “Tax.”

  6. USASpending Explorer. “FY 2022 Spending by Budget Function,” Click on Budget Function for Sub-Budget Details.

  7. DataLab. “How Much Money Did the Federal Government Collect and Spend in 2021?”

  8. Internal Revenue Service. “2021 Data Book,” Page 3.

  9. ADP. “Gross Pay vs. Net Pay: What’s the Difference?”

  10. Internal Revenue Service. “Office of Chief Counsel Internal Revenue Service Memorandum. Proper Treatment of Improperly Forgiven PPP Loans.”

  11. The Tax Foundation. “Which States Are Taxing Forgiven PPP Loans.”

  12. Internal Revenue Service. “About Form W-4, Employee’s Withholding Certificate.”

  13. Internal Revenue Service. “Publication 525, Taxable and Nontaxable Income,” Pages 3-4, 28, 33.

  14. Internal Revenue Service. “Rev. Proc. 2020-45,” Pages 5-7.

  15. Internal Revenue Service. “Rev. Proc. 2021-45,” Pages 6-7.

  16. The Tax Foundation. “Common Tax Questions Answered,” Select “What are marginal tax rates and how do they work?”

  17. Accounting Tools. “Effective Tax Rate Definition.”

  18. “State Individual Income Tax Rates and Brackets for 2022,” Tax Foundation.

  19. Bennett and Albin Randall “New Hampshire Legislation Lowers Corporate Taxes and Removes Personal Income Tax.”

  20. “Income Taxes and Your Social Security Benefit,” Social Security Administration.

  21. “List of Countries by Personal Income Tax Rate.” Trading Economics.

  22. The History Network. “Abraham Lincoln Establishes the First Federal Income Tax.”

  23. Internal Revenue Service. “When to File.”

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