An Overview of Federal Income Taxation

The Federal Income Tax Is Imposed on Earned and Unearned Income:

Tax must be paid on income derived from labor (salary, bonuses, fees, commissions, tips, self-employed earnings) and from capital (interest, dividends, rents, royalties and gains on the sale or exchange of assets).

The Federal Income Tax Is Progressive:

As income increases, higher tax rates are imposed on taxable income above specified amounts, resulting in a series of “tax rate brackets.”

Federal Income Tax Rate Brackets Are Based on Filing Status:

The tax brackets used to determine federal income tax due depend on the taxpayer’s filing status as of the last day of the tax year: single, married filing jointly, married filing separately, head of household or qualifyingn widow(er).

Federal Taxable Income Is Reduced by Deductions and Exemptions:

In order to arrive at income subject to tax, income is first reduced by a standard deduction based on filing status or, if greater, by the total of allowable itemized deductions, and by a personal exemption for the taxpayer, spouse and all dependents.

Federal Income Taxation Recognizes the Impact of Inflation:

The tax rate brackets, standard exemption amounts and personal exemption amounts are adjusted annually to reflect increases in inflation, providing an automatic annual tax reduction.

Tax Credits May Reduce the Federal Income Tax Due:

Unlike deductions and exemptions, which reduce the amount of income subject to tax, tax credits, such as the child tax credit and dependent care credit, are a direct dollar-for-dollar offset against the tax due.

An Alternative Minimum Tax May Apply:

Taxpayers may have to pay additional tax if use of itemized deductions and/or receipt of certain tax preferences result in a regular income tax that is lower than the tax that would apply if those benefits were included in taxable income.

About the author

Rusty Woods

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