What is federal income tax?
There are numerous types of taxes that most working people end up having to pay. These taxes can be levied by the government at all levels from local to federal. The income tax is one that is levied by the federal government each year on all earners of what is considered taxable income. This includes not just your basic salary or wages, but also commissions, tips, bonuses, investment income and other kinds of unearned income.
How does federal income tax work?
Federal income tax is just one form of taxation that the federal government collects from individuals as well as businesses. The amount you are taxed is based on a specified percentage of the taxable income you have earned during the particular tax reporting period. The percentage of your income that you are required to pay in federal income tax will depend on how much you earn.
Progressive tax brackets
Rates charged for federal income tax are based on a progressive taxation model. This means that the higher your income the higher percentage of your income you will be required to pay in taxes. The various levels of income tax are divided into what are known as tax brackets.
The lowest tax bracket for the 2022 tax year for single individual filers is the 10% bracket. This income bracket is for people who make $10,275 per year or less. If you fall within this tax bracket you will be charged 10% of your income by the federal government. The next bracket higher would be taxed at 12% for those earning between $10,275 and $41,775 during the tax period. At the top is the 37% tax bracket for those earning $539,900 or more.
Does Social Security count as income?
Benefits from Social Security are not considered gross income for tax purposes. However, you still may end up owing federal income tax on your benefits received, depending on how high your combined income is. The IRS calculates your combined income by adding your adjusted gross income (AGI), Social Security benefits, and nontaxable interest.
Those whose combined income is between $25,000 and $34,000 may end up being taxed on up to 50% of Social Security benefits. You can be taxed on up to 85% of your benefits if your combined income is more than $34,000.
What is federal income tax used for?
The federal government collects income tax and other forms of taxation in order to provide social services that you benefit from on a daily basis. Some of these services include infrastructure such as roads and bridges. It can also include pensions and benefits for government workers, Social Security benefits, Medicare and Medicaid. Federal income taxes contribute to funding assistance for lower income households, emergency relief, national defense, utilities, and public transportation.
When you utilize or benefit from these programs or services you may want to remember that paying your federal income tax helps make these things possible for you and everybody else. Therefore, be sure to file and pay your federal income taxes in a timely manner. This can also help to avoid incurring late fees and penalties.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of the author and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.