What Is Federal Income Taxation?

When tax season comes around, it causes frustration for many American taxpayers. Federal and state tax laws are confusing and always changing. If you don’t calculate the right amount, you can get hit with penalties and interest. It helps to understand the basics of the federal income tax system so you won’t get caught off guard.

This is an overview of the federal income tax system. However, tax laws change all the time. Talk to a tax professional or tax attorney about your individual situation.

What Are Federal Income Taxes?

The federal government taxes a portion of income from individuals and businesses. The government uses these income taxes to pay for infrastructure, health care, national defense, and other public services. The Internal Revenue Service (IRS) is the federal agency responsible for regulating and collecting income taxes.

What Income Is Taxable?

According to the Internal Revenue Code, gross income means all income from whatever source you get it from. This is a broad definition and includes income from wages, small business income, and profits from selling property. Income also includes gambling winnings or prizes from a game show. It could even include income from illegal activities. 

Not all of your income will be taxable. To calculate your taxable income, you take your total income minus deductions, credits, and adjustments that you qualify for. This is your adjusted gross income (AGI). Some people with a low income will owe no income taxes. You may actually get money back in the form of a tax refund because you paid too much over the year. 

What Is the Difference Between Tax Deductions and Tax Credits?

Tax credits and tax deductions both reduce what you owe. Tax deductions lower your taxable income. Credits reduce the amount of taxes owed. A $1,000 tax credit is worth much more to most taxpayers than a $1,000 tax deduction. 

Some of the most common types of tax credits include the earned income tax credit (EIC) and the child tax credit. 

Taxpayers can generally elect either the standard deduction or itemize their deductions. Itemized deductions can include charitable donations, retirement plan contributions, and mortgage interest. Generally, your tax preparation software will review your taxes and select the deduction that’s worth more for you. Most taxpayers end up taking the standard deduction. 

What Is Your Tax Rate?

The tax rate is the percentage rate applied to your income. The federal income tax bracket for individual taxpayers can change every year. The income tax bracket depends on your filing status:

• Single filer
• Married filing jointly
• Married filing separately
• Head of household

Income is either regular income or capital gains. Capital gains have different tax rates depending on whether they are short-term or long-term.

For regular income, your federal income tax rate will depend on your income level. The tax bracket is a progressive tax. This means the rate is higher when your income increases. As you reach each new bracket, the marginal tax rate goes up. The effective tax rate is the overall average percentage of taxes.

This can be confusing because it may seem like all your income gets taxed higher if you have a higher income. However, you may only pay more on those additional dollars over the next income threshold.

This is how tax brackets work. For example, suppose $10,000 to $50,000 has a 10% tax rate. Then, $50,001 to $100,000 has a 20% tax rate. You have an AGI of $60,000. You will owe 10% on the first $50,000. The remaining $10,000 is taxed at 20%.

When Do You Have To File Your Income Tax Return?

For most taxpayers, your taxes are due on tax day. The tax filing deadline for the prior year is April 15. For example, for tax year 2024, the tax filing deadline is April 15, 2025. However, it may be a day or two later if April 15 is on a weekend or holiday.

You can file for an extension. The IRS will grant an extension for six months until October 15. However, the extension is only for filing. The extension does not apply to paying your total income tax. You have to pay the full amount of tax by April 15, or you will face interest and penalties.

If you don’t file your taxes by the tax deadline and don’t request an extension, the IRS can issue penalties for failure to file. Unpaid taxes are subject to failure to pay penalties. This is in addition to interest.

What Happens If You Can’t Pay Your Taxes?

For any amount of your individual income tax not paid by April 15, the IRS will begin to charge interest and late penalty fees. The failure to pay penalty will continue to grow until it reaches a maximum of 25% of your unpaid taxes.

If you can’t pay your tax bill, you may have a few options. If you cannot pay the full balance on time, pay what you can. This will reduce the amount of the interest and penalties. Depending on your financial situation, you might consider a short-term loan or making a credit card payment.

Contact the IRS if you are having financial trouble and cannot afford your tax debt. They may be able to work out a payment plan to pay your taxes over time. This can lower the penalties. In some cases, the IRS may agree to an offer in compromise (OIC) to reduce your total tax debt.

How Can a Federal Tax Lawyer Help?

A tax lawyer has experience dealing with the IRS and understands federal tax laws. An experienced tax lawyer near you can advise you on strategies to lower your taxable income. If the IRS notifies you of a tax audit, your attorney can represent you in any tax disputes.