How US Federal Income Tax Works
The US federal income tax system is progressive — higher income is taxed at higher rates, but only the income within each bracket is taxed at that rate. This is a common misconception: if you earn $50,000, you don't pay 22% on all $50,000. You pay 10% on the first $11,600, 12% on income from $11,601–$47,150, and 22% only on income above $47,150 (2024 brackets for single filers).
2024 Federal Tax Brackets (Single Filers)
10%: $0 – $11,600
12%: $11,601 – $47,150
22%: $47,151 – $100,525
24%: $100,526 – $191,950
32%: $191,951 – $243,725
35%: $243,726 – $609,350
37%: Over $609,350
Note: Brackets adjust annually for inflation. Married filing jointly has different (wider) brackets. Check IRS.gov for current year rates.
Key Tax Terms
Gross Income: Total income before any deductions — wages, freelance income, investment gains, rental income, etc.
Adjusted Gross Income (AGI): Gross income minus "above-the-line" deductions like 401k contributions, student loan interest, and self-employment expenses. AGI determines eligibility for many credits and deductions.
Standard Deduction vs Itemizing: In 2024, the standard deduction is $14,600 (single) or $29,200 (married jointly). Itemize only if your deductible expenses (mortgage interest, state taxes, charitable donations, medical expenses) exceed the standard deduction.
Taxable Income: AGI minus deductions. This is what's actually taxed using the bracket table above.
Effective vs Marginal Rate: Your marginal rate is the rate on your last dollar of income (your "tax bracket"). Your effective rate is total tax paid divided by total income — always lower than marginal due to the progressive structure.
Common Tax-Saving Strategies
- Max out 401k/403b: 2024 contribution limit is $23,000 ($30,500 if 50+). Traditional contributions reduce taxable income dollar-for-dollar
- HSA contributions: Health Savings Account contributions are triple tax-advantaged — tax deductible going in, tax-free growth, tax-free for medical withdrawals
- Capital gains timing: Long-term capital gains (assets held 1+ year) are taxed at 0%, 15%, or 20% — far lower than ordinary income rates
- Tax-loss harvesting: Offset capital gains by selling losing investments. Up to $3,000/year of net losses can offset ordinary income
- Qualified charitable deductions: If over 70½, donate directly from your IRA (QCD) to satisfy RMDs tax-free
Frequently Asked Questions
What's the difference between tax deductions and tax credits?
Deductions reduce your taxable income. A $1,000 deduction saves you $220 if you're in the 22% bracket. Credits directly reduce your tax bill dollar-for-dollar. A $1,000 credit saves exactly $1,000 regardless of your bracket — making credits far more valuable. Common credits include the Child Tax Credit, Earned Income Credit, and American Opportunity Credit.
Do I have to pay state income tax in addition to federal?
Most states levy their own income tax (ranging from 1% to 13.3% in California). Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. State taxes are separate from federal and not calculated by this tool — use your state's tax department website for state-specific calculations.
What is FICA tax?
FICA (Federal Insurance Contributions Act) taxes fund Social Security and Medicare. Employees pay 6.2% for Social Security (on income up to $168,600 in 2024) and 1.45% for Medicare — totaling 7.65%. Employers match this amount. Self-employed individuals pay the full 15.3% (but can deduct half). These are separate from income tax.