What is income tax and how is it calculated?

Income tax is the tax that federal, state, and local governments require businesses and individuals to pay on their total income each year. Total income can include wages, tips, interest, dividends, unemployment, and pension distributions.

To calculate income tax, you must first determine your taxable income and filing status to see what tax bracket you fall into and the total deductions you are entitled to. Once you have calculated how much of your total income for the year is taxable, you can determine the amount of federal and state income taxes you owe.

When you deposit your IRS Form 1040 at the end of the year, you will already have an idea of ​​how much you can expect to pay in income tax or if you will be entitled to a refund.

How income tax works

Regardless of your immigration status, if you work and earn income in the United States, you must pay federal income tax on your total earnings to the Internal Revenue Service (IRS) each year. Based on guidelines established by the IRS, you will calculate your taxable income taking into account deductions and exemptions. Next, you’ll see if you qualify for tax credits before determining the total amount you owe in taxes.

The government uses these personal income taxes to fund national security, roads, schools, government services, and programs like Social Security.

Calculation of taxable income

Taxable income is the amount you earned during the year that is subject to tax. It is equal to your gross income, or annual revenue, minus the deductions and exemptions to which you are entitled. When you file your Form 1040 to pay taxes, you calculate your taxable income using the total wages, tips, and other offsets found in Box 1 of Form W-2.

To find the taxable income, subtract the deductions and exemptions to which you are entitled from your gross annual income.


Tax exemptions such as charitable donations or dependent exemptions reduce your taxable income and the amount you owe in taxes. Since the standard deduction increased with the Tax Cuts and Jobs Act 2017personal exemptions for 2022 have been removed.

Standard or detailed deductions

When filing your taxes, you can choose to itemize your deductions or take the standard deduction depending on your filing status. You would only want to itemize if your allowable deductions are greater than the standard deduction.

If someone can claim you as a dependent, you can claim a standard deduction of $1,150, or your total earned income plus $400, whichever is greater. If this total exceeds the standard deduction for your filing status, you will instead use the standard deduction shown below.

These prices are based on the Tax procedure 2021-45 tax.

Flat rate deduction 2022
Filing status Deduction amount
Only $12,950
Married Filing Jointly $25,900
head of household $19,400
Groom filing separately $12,950
Source: Tax Department

Understanding Your Federal Income Tax Bracket

Depending on your filing status – single, married filing jointly, married filing separately, or head of household – and your taxable income, you are placed in a federal tax bracket which determines your tax rate and the amount of tax you owe.

What is federal income tax withheld?

Federal income tax withheld is the amount withdrawn from your paychecks during the year that goes toward taxes. This number can be found in Box 2 of Form W-2, which you will receive from your employer at the end of each year.

What tax bracket am I in?

Once you’ve calculated your taxable income, you can view the current federal tax bracket based on your filing status and determine the taxes you owe. You can find your taxable income on line 37 of Form 1040.
The seven incomes tax brackets for 2022 range from 10% on income less than $10,275 to 37% on income equal to $539,900 or more for single filers. Below, you can find the effective tax rate based on your filing status and taxable income.

Federal income tax brackets and rates for 2022
Tax rate Only Married Filing Jointly head of household Groom filing separately
ten% $0 to $10,275 $0 to $28,550 $0 to $14,650 $0 to $10,275
12% $10,275 to $41,775 $20,550 to $83,550 $14,650 to $55,900 $10,275 to $41,775
22% $41,775 to $89,075 $83,550 to $178,150 $55,900 to $89,050 $41,775 to $89,075
24% $89,075 to $170,050 $178,150 to $340,100 $89,050 to $170,050 $89,075 to $170,050
32% $170,050 to $215,950 $340,100 to $431,900 $170,050 to $215,950 $170,050 to $215,950
35% $215,950 to $539,900 $431,900 to $647,850 $215,950 to $539,900 $215,950 to $323,925
37% $539,900 or more $647,850 or more $539,900 or more $323,925 or more
Source: Tax Department

National and local income tax

Only nine US states – Texas, Florida, Tennessee, Alaska, Nevada, Washington, New Hampshire, Wyoming and North Dakota – do not collect income taxes. The other 41 states levy a flat or progressive income tax.

Color-coded map of the United States showing state tax rates.

Tax credits

While deductions reduce your taxable income, tax credits reduce the amount of tax you owe, also known as tax liability. If your tax credits are more than the amount of tax you owe, you may be entitled to a refund. Be sure to follow the IRS rules for how to calculate your tax credits before claiming them on your tax return.

Individuals may be eligible for credits for families and dependents, credits for income and savings, credits for homeownership, credits for health care and credits for education. The child tax credit and the dependent’s credit are among the most common tax credits to which individuals are entitled.

How do I pay taxes or get a refund?

Once you have determined the amount of federal and state income taxes you owe for the year, you have a few options for paying them. If you filed a W-2 form with your current employer, they will take a portion of each of your paychecks to pay your income taxes throughout the year – this is your tax withheld.

Many people end up paying a little more throughout the year than they actually owe in income taxes. When filing your return, you will calculate how much you actually owe. If you have overpaid, you will be entitled to a tax refund.

If you did not have taxes deducted from your salary during the year or if you owe more than what was deducted, you will have to phave the taxes you owe when you file with the IRS. By calculating your income taxyou can estimate the amount of taxes you will have to pay in order to establish a budget throughout the year and follow our tax planning strategies to reduce your tax payable and lessen the stress of tax season.

Our budgeting app allows you to put money aside every month to pay your taxes at the end of the year and even track your refund after filing.



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