Federal Income Tax (FIT)
Summary Definition: A mandatory payment to the U.S. government based on the taxable portion of gross income an individual or business earned in a single year.
What is Federal Income Tax?
Federal income tax is a levy administered by the Internal Revenue Service (IRS) on the income of individuals, corporations, and other legal entities to fund federal programs and operations.
Income tax brackets and rates are applied to each taxpayer's taxable income, as calculated by subtracting allowable deductions from the entity's gross income. Other income types, such as investment earnings or business revenue, may be taxed differently.
The U.S. federal income tax system is progressive, meaning larger amounts of income are taxed at incrementally higher rates. For individuals, federal income tax brackets currently range from 10% to 37%, with specific federal income tax rates applied to income falling within each bracket's defined thresholds.
Key Takeaways
- Federal income taxes apply defined brackets and rates to the taxable income a person or organization earned that tax year.
- Taxable income is found by subtracting applicable tax deductions and exemptions from overall gross income.
- Annual tax returns determine taxpayers’ total tax liability based on their taxable income, applicable tax credits, and submitted tax payments.
Is FICA The Same as Federal Income Tax?
While they serve similar purposes and are both withheld from an employee’s paycheck, federal income tax is not the same as Federal Insurance Contributions Act (FICA) tax (i.e., social security and Medicare taxes).
FICA taxes are flat payroll taxes paid by both employees and employers every pay period. They only support Social Security and Medicare programs, and they use the same rates (6.20% for Social Security; 1.45% for Medicare) for most taxpayers, with the exception of an additional Medicare tax (0.9%) for high-earning individuals.
Moreover, the amount of income subject to the Social Security tax isn’t calculated by deducting various credits or exemptions from total gross income. Instead, it uses an annual wage base limit to cap each entity’s tax liability. In other words, when someone’s annual salary exceeds that limit, the remaining wages they earn that calendar year are exempt from Social Security tax.
How Much is Federal Income Tax?
Understanding how to calculate federal income tax requires several components:
- Current federal income tax brackets and rates
- An understanding of how they’re applied to taxable income
- The ability to distill taxable income from gross income
- Knowing how to use federal income tax credits
2025 Tax Brackets
Federal income tax bracket thresholds are updated annually by the IRS and vary based on a taxpayer’s filing status. The 2025 federal income tax brackets are:
| Single | Married, Filing Jointly | Married, Filing Separately | Head of Household | |
| 10% | $0 - $11,925 | $0 - $23,850 | $0 - $11,925 | $0 - $17,000 |
| 12% | $11,926 - $48,475 | $23,851 - $96,950 | $11,926 - $48,475 | $17,001 - $64,850 |
| 22% | $48,476 - $103,350 | $96,951 - $206,700 | $48,476 - $103,350 | $64,851 - $103,350 |
| 24% | $103,351 - $197,300 | $206,701 - $394,600 | $103,351 - $197,300 | $103,351 - $197,300 |
| 32% | $197,301 - $250,525 | $394,601 – $501,050 | $197,301 - $250,525 | $197,301 - $250,500 |
| 35% | $250,526 - $626,350 | $501,051 - $751,600 | $250,526 - $375,800 | $250,501 - $626,350 |
| 37% | $626,351 or more | $751,601 or more | $375,801 or more | $626,351 or more |
How Tax Brackets on Earning Work
Being in a higher income tax rate bracket doesn’t mean the highest rate applies to an individual’s entire taxable income. Instead, only the portion of taxable income that falls within a bracket’s defined limits is taxed at that bracket’s corresponding rate.
For example, suppose Taxpayer A’s taxable income for the year is $75,000, and the existing tax brackets are:
- 10%: $0 - $10,000
- 12%: $10,001 - $40,000
- 22%: $40,001 - $80,000
Instead of owing 22% of the entire $75,000 (i.e., $16,500), Taxpayer A would owe 10% on the first $10,000, 12% on the next $30,000, and 22% on the final $35,000 for a total tax liability of $12,300 ($1,000 + $3,600 + $7,700) or 16% of their taxable income (a.k.a. their effective tax rate).
How to Calculate Taxable Income
Federal income tax rate brackets are only applied to taxable income, not overall gross income. This is because portions of gross income can be deducted based on qualifying expenses the taxpayer made that year, while others may be exempt from income tax altogether.
| Details | Example | |
| Tax Deductions |
Amounts subtracted from gross income based on qualified expenses. Typically used in one of two ways:
|
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| Tax Exemptions | Amounts excluded from income tax based on how they were earned. |
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*2025 standard deduction amounts are $15,000 (single or married, filing separately), $22,500 (head of household), and $30,000 (married, filing jointly).
**Up to a specified limit ($19,000 in 2025).
Is FICA The Same as Federal Income Tax?
Tax credits are reductions to an individual’s total tax liability made after the correct tax brackets and rates have been applied to their taxable income. Furthermore, they’re primarily classified by whether they provide taxpayers a refund when the credit is larger than what the individual owes (i.e., refundable vs. non-refundable).
If, for example, a taxpayer owes $500 in taxes but can claim a $750 tax credit, a refundable credit would cover the entire amount and provide the individual with $250, while a non-refundable credit would only cover the owed amount.
Common income tax credits include:
- American Opportunity Tax Credit: A partially refundable tax credit for qualified tuition, fees, and course materials during the first four years of post-secondary education
- Earned Income Tax Credit: A refundable credit benefit for low- and moderate-income workers, designed to reduce taxes and support working families, though smaller benefits are available to childless individuals.
- Child and Dependent Care Tax Credit: A non-refundable credit intended to help working individuals or those actively seeking employment offset the cost of caregiving for qualifying dependents.
What is Federal Income Tax Liability?
An individual’s income tax liability is how much they owe in income taxes after all deductions, exemptions, etc., have been applied.
Paying Federal Income Tax
Federal income tax payment methods differ based on whether the taxpayer is a hired employee or an independent contractor.
Employees will see federal income tax withholding as a mandatory deduction from each paycheck that employers submit to the IRS on the employee’s behalf. Independent contractors, however, submit their own quarterly estimated tax payments directly to the agency.
To assist with this process, organizations sometimes partner with a payroll service provider suited for handling federal income tax calculations at scale and adjusting to annual tax rate changes. These services can save employers time and energy while providing employees with easily accessible tax data for their tax returns.
Federal Income Tax Returns
After the tax year ends, taxpayers file a federal income tax return to report their total income, deductions, credits, exemptions, etc. Based on that information, their final income tax liability is calculated and compared to the taxes paid throughout the year to determine if they should receive a tax refund or owe additional taxes.
Additional Federal Income Tax Types
Federal income taxes apply differently for particularly high-earning taxpayers and legal entities that aren’t individual people (i.e., corporations).
Alternative Minimum Tax
Alternative Minimum Tax (AMT) is a parallel income tax system that ensures high-earning individuals, estates, and trusts pay a baseline level of taxes, regardless of how many deductions, exclusions, or credits they claim.
To that end, AMT recalculates taxable income using an adjusted framework that adds various deductions and exclusions back into the taxpayer’s gross income and applies adjusted tax bracket rates (26% or 28%). The total AMT liability is compared to the taxpayer’s standard income tax liability, and the greater amount is what’s owed.
Federal Corporate Income Tax
Federal corporate income tax applies to the profits corporations earn within the U.S. The 21% tax rate applies uniformly to profits generated by both domestic corporations and U.S.-based operations of foreign multinational companies.
Taxable profits are calculated by subtracting eligible deductions from the corporation's total revenue, such as the cost of goods sold, employee wages and benefits, or advertising expenses.
Some corporations (e.g., S-Corporations) are exempt from income taxes, but those that aren’t must file annual tax returns and typically make quarterly estimated tax payments to meet their obligations.
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