Tax
Quick Definition
A tax is a compulsory financial charge that a government levies on individuals and businesses to fund public spending. In the United States, the federal income tax is the largest single tax most people pay, calculated on a progressive scale where higher income portions are taxed at higher rates through a system of tax brackets.
What It Means
Taxes are the price of living in a functioning society. They fund roads, schools, military defense, courts, emergency services, scientific research, and social insurance programs like Social Security and Medicare. The federal government collected approximately $4.9 trillion in revenue during fiscal year 2025, with individual income taxes accounting for roughly half of that total.
The U.S. tax system is progressive, meaning that as your income rises, the additional dollars are taxed at higher rates. This does not mean your entire income is taxed at your top rate. Only the portion of income that falls within each bracket is taxed at that bracket's rate. A single person earning $60,000 in 2026 pays 10% on the first $12,400, 12% on income from $12,401 to $50,400, and 22% only on the amount above $50,400. This marginal system means your effective tax rate (total tax divided by total income) is always lower than your top marginal rate.
Taxes exist at every level of government. Federal income tax, state income tax (in 41 states that levy one), local income tax (in certain cities and counties), payroll taxes for Social Security and Medicare, property taxes, sales taxes, capital gains taxes, estate taxes, gift taxes, and excise taxes on specific goods like gasoline, alcohol, and tobacco all contribute to the total tax burden most Americans face.
How It Works
Federal Income Tax
The federal income tax is calculated on Form 1040 each year. The process follows a clear sequence:
- Report all income: Wages, self-employment income, investment income, retirement distributions, and other sources
- Calculate adjusted gross income: Subtract above-the-line adjustments like HSA contributions and student loan interest
- Subtract deductions: Take either the standard deduction or itemized deductions
- Apply tax brackets: The remaining taxable income is taxed at progressive rates
- Apply credits: Tax credits reduce your bill dollar for dollar
- Subtract withholdings and payments: Compare what you owe against what was already withheld from paychecks
2026 Federal Income Tax Brackets
The IRS adjusts tax brackets annually for inflation. For the 2026 tax year (returns filed in 2027), the brackets are:
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 to $12,400 | $0 to $24,800 | $0 to $17,700 |
| 12% | $12,401 to $50,400 | $24,801 to $100,800 | $17,701 to $67,450 |
| 22% | $50,401 to $105,700 | $100,801 to $211,400 | $67,451 to $105,700 |
| 24% | $105,701 to $201,775 | $211,401 to $403,550 | $105,701 to $201,775 |
| 32% | $201,776 to $256,225 | $403,551 to $512,450 | $201,776 to $256,200 |
| 35% | $256,226 to $640,600 | $512,451 to $768,700 | $256,201 to $640,600 |
| 37% | $640,601 and above | $768,701 and above | $640,601 and above |
2026 Standard Deduction
| Filing Status | Standard Deduction |
|---|---|
| Single or Married Filing Separately | $16,100 |
| Married Filing Jointly or Surviving Spouse | $32,200 |
| Head of Household | $24,150 |
The standard deduction means a single person with $16,100 or less in taxable income pays zero federal income tax for 2026. A married couple with $32,200 or less pays zero.
Payroll Taxes (FICA)
In addition to income tax, workers pay payroll taxes under the Federal Insurance Contributions Act:
| Tax | Rate | 2026 Wage Base |
|---|---|---|
| Social Security (OASDI) | 6.2% (employee) + 6.2% (employer) | $184,500 |
| Medicare (HI) | 1.45% (employee) + 1.45% (employer) | No limit |
| Additional Medicare | 0.9% (employee only) | Over $200,000 single / $250,000 MFJ |
Self-employed individuals pay both halves through the self-employment tax, which is 12.4% for Social Security (up to the wage base) plus 2.9% for Medicare (no limit). They can deduct the employer half as an above-the-line adjustment.
Capital Gains Tax
Investment profits are taxed differently depending on how long you held the asset:
| Holding Period | Tax Rate | 2026 Single Filer Thresholds |
|---|---|---|
| Short-term (1 year or less) | Ordinary income rates | Same as regular brackets |
| Long-term (over 1 year) | 0% | $0 to $49,450 |
| Long-term | 15% | $49,451 to $545,500 |
| Long-term | 20% | $545,501 and above |
Long-term capital gains rates apply to profits from investments held more than one year. The preferential rates (0%, 15%, 20%) are based on your taxable income. Read our capital gains tax guide for details.
Real-World Examples
Example 1: Single Filer Tax Calculation
David is single, earns $75,000 in wages, and takes the standard deduction for 2026:
| Step | Calculation | Amount |
|---|---|---|
| Wages | $75,000 | |
| Standard deduction | -$16,100 | |
| Taxable income | $58,900 | |
| Tax on first $12,400 | 10% | $1,240 |
| Tax on $12,401 to $50,400 | 12% of $38,000 | $4,560 |
| Tax on $50,401 to $58,900 | 22% of $8,500 | $1,870 |
| Total federal income tax | $7,670 | |
| Effective tax rate | $7,670 / $75,000 | 10.2% |
David's top marginal rate is 22%, but his effective rate is only 10.2% because most of his income falls in the lower brackets and the standard deduction shields $16,100 from tax entirely.
Example 2: High Earner with Investment Income
Jennifer is single, earns $300,000 in wages, and has $25,000 in long-term capital gains:
| Item | Amount |
|---|---|
| Wages | $300,000 |
| Long-term capital gains | $25,000 |
| Total income | $325,000 |
| Standard deduction | -$16,100 |
| Taxable income | $308,900 |
| Ordinary tax on $283,900 (wages minus deduction) | ~$70,560 |
| Capital gains tax (15% on $25,000) | $3,750 |
| Total federal income tax | ~$74,310 |
Jennifer's ordinary income is taxed at rates up to 35%, but her long-term capital gains are taxed at 15% because her taxable income falls between $49,451 and $545,500 for the 15% capital gains bracket.
Example 3: Self-Employment Tax
Carlos runs a consulting business with $100,000 in net profit:
| Item | Amount |
|---|---|
| Net business income | $100,000 |
| Self-employment tax (14.13% of $92,350 after 7.65% reduction) | $13,055 |
| SE tax deduction (50%) | -$6,528 |
| AGI | $93,472 |
| Standard deduction | -$16,100 |
| Taxable income | $77,372 |
| Income tax (2026 brackets) | ~$11,830 |
| Total federal tax (income + SE tax) | ~$24,885 |
Carlos pays both income tax and self-employment tax. The SE tax covers his Social Security and Medicare contributions since he has no employer to pay the other half.
Types of Taxes in the United States
| Tax Type | Level | What It Taxes |
|---|---|---|
| Federal income tax | Federal | Wages, investments, business income |
| State income tax | State (41 states) | Same income base, varying rates |
| Local income tax | City/County | Earned income in specific jurisdictions |
| Payroll tax (FICA) | Federal | Wages up to $184,500 (SS), all wages (Medicare) |
| Capital gains tax | Federal | Profits from selling investments |
| Property tax | Local | Real estate and sometimes vehicles |
| Sales tax | State/Local | Purchases of goods and services |
| Estate tax | Federal | Transfers at death above $15 million (2026) |
| Gift tax | Federal | Gifts above $19,000 per recipient (2026) |
| Excise tax | Federal/State | Gasoline, alcohol, tobacco, specific goods |
Key Points to Remember
- The U.S. uses a progressive tax system where higher income portions are taxed at higher rates, not where all income is taxed at your top rate
- The 2026 standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly, meaning income below these levels pays zero federal income tax
- Payroll taxes (Social Security and Medicare) are separate from income tax and apply to wages regardless of your tax bracket
- Long-term capital gains are taxed at preferential rates (0%, 15%, or 20%) compared to ordinary income rates (10% to 37%)
- The 2026 estate tax exemption is $15 million per individual, meaning estates below that amount owe no federal estate tax
- Nine states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming
- Tax credits reduce your tax bill dollar for dollar, making them more valuable than deductions of the same amount
Common Mistakes to Avoid
- Confusing marginal and effective tax rates: Your marginal rate is the rate on your last dollar earned. Your effective rate is your total tax divided by total income. A single person earning $60,000 has a 22% marginal rate but an effective rate around 9%.
- Forgetting about payroll taxes: FICA taxes take 7.65% of wages (6.2% Social Security + 1.45% Medicare) before you even calculate income tax. For lower-income workers, payroll taxes can exceed income taxes.
- Overlooking tax credits: Credits like the Earned Income Tax Credit, Child Tax Credit, and Saver's Credit can reduce your tax bill by thousands of dollars. Many are refundable, meaning you can get money back even if you owe no tax.
- Not understanding capital gains rates: Selling an investment one day before the one-year mark results in short-term capital gains taxed at ordinary rates. Waiting one extra day can cut the rate from 24% to 15% on a large gain.
- Ignoring state and local taxes: State income taxes range from zero (Texas, Florida) to over 13% (California top rate). Property taxes and sales taxes add to the total burden. Always factor in state and local taxes when comparing cost of living between locations.
Related Concepts
Taxes touch nearly every financial decision you make. Your Form 1040 is where federal income tax is calculated each year, starting from your adjusted gross income and flowing through your tax bracket to determine what you owe. Investment profits are subject to capital gains tax, and strategies like tax loss harvesting can reduce that burden. Payroll taxes fund Social Security and Medicare through FICA withholding. Large estates may face the estate tax, though the 2026 exemption of $15 million shields most families. To estimate your tax liability, use our tax bracket calculator or take-home pay calculator. For a beginner-friendly overview, read taxes explained for beginners or how tax brackets work.
Frequently Asked Questions
Q: What is the difference between a tax deduction and a tax credit? A: A tax deduction reduces your taxable income. A tax credit reduces your tax bill directly. A $1,000 deduction at a 22% bracket saves you $220 in tax. A $1,000 credit saves you $1,000. Credits are always more valuable than deductions of the same dollar amount. Refundable credits can even put money in your pocket if your tax bill is zero.
Q: Why do I get a tax refund? A: A refund means you overpaid during the year through withholding or estimated payments. The IRS returns the excess. Getting a large refund is not a windfall; it means you gave the government an interest-free loan. Adjusting your W-4 withholding to get a smaller refund gives you more money in each paycheck instead.
Q: What is the difference between progressive and flat tax systems? A: A progressive tax system (like U.S. federal income tax) charges higher rates on higher income portions. A flat tax system charges the same rate on all income regardless of amount. Some states use flat income tax rates, while the federal system uses seven progressive brackets ranging from 10% to 37%.
Q: Do I have to pay taxes on Social Security benefits? A: It depends on your combined income (AGI plus nontaxable interest plus half of Social Security benefits). If combined income exceeds $25,000 (single) or $32,000 (married filing jointly), up to 50% of benefits may be taxable. If combined income exceeds $34,000 (single) or $44,000 (MFJ), up to 85% of benefits may be taxable. These thresholds are not adjusted for inflation.
Q: What is the highest tax rate in the U.S.? A: The highest federal income tax rate is 37% for taxable income above $640,600 (single) or $768,700 (MFJ) in 2026. When you add the 3.8% Net Investment Income Tax on investment earnings above $200,000 (single) or $250,000 (MFJ), the effective top rate on investment income can reach 23.8% for long-term gains or 40.8% for ordinary investment income. State taxes can push the total even higher in states like California.
