Overview
Taxes are an integral part of the workings of money — not just a mandatory payment but a mechanism for funding the services and infrastructure that underpin a functioning society. Income taxes are taxes imposed on individuals or entities with respect to their income or profits, typically calculated as a percentage of taxable income after allowable deductions.
There are four main types of income taxes in the US:
Individual Income Tax
A tax on income earned by individuals or households — wages, salaries, self-employment, investments, and retirement income. Federal individual income tax is progressive.
Corporate Income Tax
Levied on the profits of corporations. Both federal and state governments impose corporate income taxes on revenues minus costs of doing business.
Payroll Tax
Levied on wages and salaries, primarily funding Social Security and Medicare. These taxes are typically split between employers and employees.
Capital Gains Tax
Applies to profits from the sale of assets like stocks, bonds, and real estate. Rates vary depending on how long the asset was held and the taxpayer’s income bracket.
Marginal vs. Effective Tax Rate
This is one of the most commonly misunderstood distinctions in personal finance. Understanding it prevents the mistaken belief that earning more money could result in less take-home pay.
Marginal Tax Rate
The tax rate applied to the next dollar of income earned — the rate of your highest bracket. When income moves into a higher bracket, only the income within that new bracket is taxed at the higher rate. Not your entire income.
Effective Tax Rate
The actual percentage of your total income paid in taxes, calculated by dividing total tax liability by total taxable income. Almost always lower than the marginal rate due to the progressive structure.
| Bracket | Income in Bracket | Rate | Tax |
|---|---|---|---|
| $0 – $11,925 | $11,925 | 10% | $1,193 |
| $11,926 – $48,475 | $36,550 | 12% | $4,386 |
| $48,476 – $75,000 | $26,525 | 22% | $5,836 |
| Total Tax Liability | — | $11,415 | |
Marginal Rate
Top bracket rate — but only $26,525 is taxed at this rate
Effective Rate
$11,415 ÷ $75,000 — what is actually paid on total income
The same principle applies at higher incomes. A person with $150,000 of taxable income has a top marginal rate of 24% — but an effective rate typically around 19%, because the lower brackets are taxed at 10%, 12%, and 22% before any income reaches the 24% bracket.
2025 Federal Tax Brackets — Single Filer
The US uses a progressive tax system with seven income ranges called tax brackets. As income increases, it falls into higher brackets — but only that portion of income is taxed at the higher rate.
| Rate | Income Range | Tax on This Portion | Relative Rate |
|---|---|---|---|
| 10% | $0 – $11,925 | 10 cents per dollar | |
| 12% | $11,926 – $48,475 | 12 cents per dollar | |
| 22% | $48,476 – $103,350 | 22 cents per dollar | |
| 24% | $103,351 – $197,300 | 24 cents per dollar | |
| 32% | $197,301 – $250,525 | 32 cents per dollar | |
| 35% | $250,526 – $626,350 | 35 cents per dollar | |
| 37% | Over $626,350 | 37 cents per dollar |
Brackets vary for other filing statuses: Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse. Tax brackets are adjusted annually for inflation.
Reducing Your Tax Liability
Taxable income — the amount your tax is actually calculated on — is lower than your gross income due to deductions. Tax credits then directly reduce what you owe.
Standard Deduction (2025)
A fixed amount deducted based on filing status. For a single filer in 2025, the standard deduction is $15,000. Nine out of ten taxpayers take the standard deduction according to the IRS.
Itemized Deductions
Specific expenses deducted if the total exceeds the standard deduction. Includes state & local taxes (capped at $10,000), mortgage interest, charitable contributions, and qualifying medical expenses.
Tax Credits
Directly reduce tax owed — dollar for dollar — unlike deductions which reduce taxable income. Credits may be non-refundable (reduce liability to $0) or refundable (may generate a refund). Examples: child tax credit, earned income credit, education credits.
Above-the-Line Deductions
Deducted from gross income before reaching taxable income. Key examples: 401(k) contributions, traditional IRA contributions, student loan interest. These reduce your AGI directly.
Filing Status & Other Considerations
Your filing status is determined by marital status and family situation on the last day of the tax year. It affects your standard deduction, tax brackets, and available credits:
Tax Withholding: For most employees, income tax is withheld from each paycheck based on Form W-4 information provided to the employer.
Estimated Taxes: Self-employed individuals and those with significant non-wage income may need to pay estimated taxes quarterly to avoid IRS penalties.
Tax Day: The federal income tax filing deadline is generally April 15th. A six-month extension to file is available, but does not extend the deadline to pay taxes owed.
How to Calculate Your Income Tax
- Determine your gross income. Add up all income from wages, salaries, self-employment, investments, and any other sources.
- Calculate your Adjusted Gross Income (AGI). Subtract above-the-line deductions from gross income — such as 401(k) contributions, traditional IRA contributions, and student loan interest payments.
- Determine your taxable income. Subtract either the standard deduction or your total itemized deductions from your AGI. This is the amount your tax is based on.
- Calculate your tax liability. Apply the appropriate tax brackets for your filing status, calculating the tax owed on each portion of taxable income that falls in each bracket. Add the results together.
- Apply tax credits. Reduce your total tax liability by any credits you are eligible for. Credits reduce taxes owed dollar for dollar.
- Determine your refund or amount owed. Compare your total tax liability to taxes already paid through withholding or estimated payments. If you overpaid, you receive a refund. If underpaid, you owe the difference.
Retirement tax planning: How and when you draw retirement income — from which accounts, in what order, and in what amounts — can significantly affect your effective tax rate in retirement. Strategies like tax-free income from a LIRP or IUL can help you retire paying little or no taxes. Contact us to discuss your situation.