Tax Glossary
Key Tax TermIncome Tax
Income tax is a tax you pay to the federal government—and sometimes your state—based on the money you earn. The IRS uses your taxable income to determine how much tax you owe using a bracket system. Most people pay income tax through paycheck withholding or by making estimated payments.
💡Simple definition
Income tax is the tax you pay on the money you earn. It applies to wages, salaries, business income, investments, and more. The IRS calculates your tax based on:
- •Your taxable income
- •Your filing status
- •Where your income falls in the tax brackets
🧮How income tax is calculated
Income tax is not one flat rate. Instead, the IRS uses a progressive tax system, meaning different parts of your income are taxed at different rates.
The steps:
- 1.Start with gross income
- 2.Subtract adjustments → AGI
- 3.Subtract deductions → taxable income
- 4.Apply the IRS tax brackets
- 5.Subtract credits (like the Child Tax Credit or EITC)
- 6.Result = your total tax owed
🏛️Federal vs. state income tax
Most people pay income tax at two levels:
🇺🇸Federal income tax
Paid to the U.S. government. Uses progressive tax brackets.
📍State income tax
Paid to your state—unless you live in a no-income-tax state like Texas, Florida, or Washington.
💡 Some cities (like New York City) also have local income taxes.
💰What income is taxed?
The IRS taxes a wide range of income, including:
- ✓Wages and salaries (W-2 income)
- ✓Tips and commissions
- ✓Self-employment income
- ✓Interest and dividends
- ✓Capital gains
- ✓Rental income
- ✓Business income
- ✓Certain retirement withdrawals
Your taxable income is not always the same as your total earnings.
📊Quick example: Progressive tax in action
Suppose your taxable income is $50,000. The IRS will divide that income across several tax brackets, such as:
- •The first chunk is taxed at 10%
- •The next chunk at 12%
- •The remainder at 22% (depending on your filing status)
These rates combine to create your total federal income tax—NOT one single flat rate.
⭐Why income tax matters
Understanding income tax helps you:
- ✓Estimate your refund or amount owed
- ✓Plan paycheck withholding
- ✓Know how credits and deductions save you money
- ✓Understand how tax brackets actually work
📄Where do you report income tax?
Your total federal tax owed is shown on Form 1040. State income taxes are reported on your state's return if applicable.
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