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Overview of Federal Taxes

Income in America is taxed by the federal government, most states governments and many local governments. The federal income tax system is progressive, so the rate of taxation increases as income increases. Marginal tax rates range from 10% to 39.6%.

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The Federal Income Tax

The federal personal income tax that is administered by the Internal Revenue Service (IRS) is the largest source of revenue for the U.S. federal government. Nearly all working Americans are required to file a tax return with the IRS each year and most pay taxes throughout the year in the form of payroll taxes that are withheld from their paychecks.

Income taxes in the U.S. are calculated based on tax rates that range from 10% to 39.6%. Taxpayers can lower their tax burden and the amount of taxes they owe by claiming exemptions, deductions and credits. Below, we’ll take a closer look at the most important IRS tax rules to help you understand how your taxes are calculated.

Calculating Income Tax Rate

The United States has a progressive income tax. This means there are higher tax rates for higher income levels. These are called “marginal tax rates” – they do not apply to total income, but only to the income within a specific range.

These ranges are called brackets. Income falling within a specific bracket is taxed at the rate for that bracket. The table below shows the tax brackets for the federal income tax.

2015 - 2016 Income Tax Brackets

Single Filers
Taxable IncomeRate
$0 - $9,22510.00%
$9,225 - $37,45015.00%
$37,450 - $90,75025.00%
$90,750 - $189,30028.00%
$189,300 - $411,50033.00%
$411,500 - $413,20035.00%
$413,200+39.60%
Married, Filing Jointly
Taxable IncomeRate
$0 - $18,45010.00%
$18,450 - $74,90015.00%
$74,900 - $151,20025.00%
$151,200 - $230,45028.00%
$230,450 - $411,50033.00%
$411,500 - $464,85035.00%
$464,850+39.60%
Married, Filing Separately
Taxable IncomeRate
$0 - $9,22510.00%
$9,225 - $37,45015.00%
$37,450 - $75,60025.00%
$75,600 - $115,22528.00%
$115,225 - $205,75033.00%
$205,750 - $232,42535.00%
$232,425+39.60%
Head of Household
Taxable IncomeRate
$0 - $13,15010.00%
$13,150 - $50,20015.00%
$50,200 - $129,60025.00%
$129,600 - $209,85028.00%
$209,850 - $411,50033.00%
$411,500 - $439,00035.00%
$413,200+39.60%

You’ll note that the brackets vary depending on whether you are single, married or the head of household. These different categories are called filing statuses. Married persons can choose to file separately or jointly. While it often makes sense to file jointly, filing separately may be the better choice in certain situations.

Based on the rates in the table above, a single filer with an income of $50,000 would have a top marginal tax rate of 25%.

However, that taxpayer would not pay that rate on all $50,000. The rate on the first $9,225 of taxable income would be 10%, on the next $28,225 would be 15% and on the remaining $12,550 would be 25%. This is because marginal tax rates only apply to income that falls within that specific bracket.

Calculating Taxable Income Using Exemptions and Deductions

Federal tax rates apply to taxable income. This is different than your total income (also called gross income). Taxable income is always lower than gross income.

To calculate taxable income, you begin by making certain adjustments from gross income to arrive at adjusted gross income (AGI). Possible adjustments include subtractions for student loan interest payments,contributions to an IRA, moving expenses and health-insurance contributions for self-employed persons.

Once you have calculated adjusted gross income, you can subtract exemptions and deductions (either itemized or standard) to arrive at taxable income. For the 2015 tax year, the exemption is equal to $4,000.

Exemptions can be claimed for each taxpayer as well as dependents such as a spouse and children. For each exemption claimed, you can subtract $4,000 from your taxable income.

Deductions are somewhat more complicated. Many taxpayers claim the standard deduction, which varies depending on filing status, as shown in the table below.

Standard Deductions (Updated April 2015)

Filing StatusStandard Deduction Amount
Single Filers$6,300
Married, Filing Jointly$12,600
Married, Filing Separately$6,300
Head of Household$9,250

Some taxpayers, however, may choose to itemize their deductions. This means subtracting certain eligible expenses and expenditures. The most common itemized deductions include:

  • Deduction for state and local taxes paid. Taxpayers can deduct the entirety of any state and local taxes (including income, property and generalized sales taxes) that they paid for that tax year.
  • Deduction for mortgage interest paid. Interest paid on the mortgages on up to two homes, and a total of $1,000,000 in debt can be subtracted.
  • Deduction for charitable contributions.
  • Deduction for medical expenses that exceed 10% of AGI.

Keep in mind that many taxpayers don’t itemize their deductions. If the standard deduction is larger than the sum of your itemized deductions (as it is for many taxpayers), you receive the standard deduction.

Once you have subtracted exemptions and deductions from your adjusted gross income, you have your taxable income. For some taxpayers, this may be zero, which means you do not owe any income tax.

How to Calculate Federal Tax Credits

Unlike adjustments, exemptions and deductions, which apply to your income, tax credits apply to your tax liability (which means the amount of tax that you owe).

For example, if you calculate that you have tax liability of $1,000 (based on your taxable income and your tax bracket) and you are eligible for a tax credit of $200,that would reduce your liability to $800. You would only owe $800.

Tax credits are only awarded in certain circumstances, however. Some credits are refundable, which means you can receive payment for them even if you don’t owe any income tax. The list below describes the most common federal income tax credits.

  • The Earned Income Tax Credit is a refundable credit for taxpayers with income below a certain level. The credit can be up to $6,143 per year for taxpayers with three or more children, or lower amounts for taxpayers with two, one or no children.
  • The Child and Dependent Care Credit is a nonrefundable credit of up to $3,000 (for one child) or $6,000 (for two or more) related to childcare expenses incurred while working or looking for work.
  • The Adoption Credit is a nonrefundable credit equal to certain expenses related to the adoption of a child.
  • The American Opportunity Credit is a partially refundable credit of up to $2,500 per year for enrollment fees, tuition and course materials for the first four years of post-secondary education.

There are numerous other credits, including credits for the installation of energy-efficient equipment, a credit for foreign taxes paid and a credit for health insurance payments in some situations.

Calculating Your Tax Refund

Whether or not you get a tax refund depends on the amount of taxes you paid during the year (because they were withheld from your paycheck), your tax liability and whether or not you received any refundable tax credits.

When you file your tax return, if the amount of taxes you owe (your tax liability) is less than the amount that was withheld from your paycheck during the course of the year, you will receive a refund for the difference. This is the most common reason people receive a tax refund.

If you paid no taxes during the year and owe no taxes, but are eligible for one or more refundable tax credits, you will also receive a refund equal to the refundable amount of the credits.

Paying Your Taxes

If you aren’t getting a tax refund and instead owe money come tax day, there may be a way to lessen the sting. You can pay your taxes by credit card in order to get valuable rewards and points. One option is to use a service that lets you pay your taxes by credit card. The IRS has authorized three payment processors to collect tax payments by credit card: PayUSAtax, Pay1040 and Official Payments. All three charge fees for credit card payments.

If you don’t think you’ll be able to pay off the balance by your next credit card due date, you can look into a balance transfer to a credit card with a 0% APR. Once your balance is transferred, you’ll have an introductory period (usually 12 months) at a 0% APR to pay down your debt while not accruing new interest charges. Of course, if you don’t pay off your debt within the introductory period your balance will be subject to a regular APR that could be higher than what you had before. But for savvy customers a balance transfer can be a smart way to deal with lingering debt from tax time.

State and Local Income Taxes

Many states as well as some cities and counties have their own income tax, which is collected in addition to the federal income tax. States that do have a state income tax require that you file a separate state tax return and have their own rules. If you are curious about a particular state’s tax system and rules, visit one of our state tax pages.

Photo credits: ©iStock.com/Veni, ©iStock.com/Pgiam, ©iStock.com/ShaneKato

Places with the Lowest Tax Burden

SmartAsset’s interactive map highlights the counties with the lowest tax burden. Scroll over any county in the state to learn about taxes in that specific area.

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Rank County Income Tax Sales Tax Property Tax Fuel Tax

Methodology

Where you live can have a big impact on both which types of taxes you have to pay each year and how much money you spend on them. SmartAsset calculated the amount of money a specific person would pay in income, sales, property and fuel taxes in each county in the country and ranked the lowest to highest tax burden.

To better compare income tax burdens across counties, we used the national median household income. We then applied relevant deductions and exemptions before calculating federal, state and local income taxes.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a county by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For property taxes, we compared the median property taxes paid in each county.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the county level using the number of vehicles in each county. We then calculated the total number of licensed drivers within each county. The countywide miles were then distributed amongst the licensed drivers in the county, which gave us the miles driven per licensed driver. Using the nationwide average fuel economy, we calculated the average gallons of gas used per driver in each county and multiplied that by the fuel tax.

We then added the dollar amount for income, sales, property and fuel taxes to rank the counties to calculate a total tax burden.

Sources: US Census Bureau 2015 American Community Survey, Government Sources, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration, SmartAsset

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