Federal income tax: What it is, how it works, and what you’ll pay for 2022
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- Federal taxes are charged on most personal and corporate income to raise funds for government services.
- There are seven brackets for 2022 that tax individual income at progressively higher levels.
- Americans have been paying income taxes since the Civil War.
- See Personal Finance Insider’s picks for the best tax software »
The federal income tax is levied by the Internal Revenue Service on individual and corporate income to pay for government services. Income can come from a job, investments, a business, or retirement funds, and most of it is taxable. Individual incomes are taxed at progressively higher rates as the total taxable amount increases, while businesses are taxed at a flat rate.
The federal income tax originated in the 1860s when the government needed to raise funds for the Civil War, and was ratified into law in 1913 with the 16th amendment.
How federal income tax works
Citizens and residents, corporations, trusts, estates, and other legal entities all pay income tax on their worldwide income, unless it is specifically exempted by law. In fact, anyone who earns income in the US can be taxed. Married couples can be taxed together or separately.
The federal income tax is collected three ways. The first is direct withholding of the tax at the time of payment from an employer. The second is through quarterly estimated payments. The third is through annual filings. If for some reason your employer didn’t withhold enough, or if you had other sources of income, say from a rental property or the sale of stocks, the filing process allows the government to monitor and make sure you paid all the tax due. In fiscal year 2021, the IRS collected more than $4.1 trillion in gross taxes.
The federal government uses income tax revenue to support an array of services, with national defense, health care, and public assistance programs among the largest.
Federal income tax brackets
The government taxes different portions of a person’s income at different rates that become progressively higher as the total amount of income increases. There are seven of these tax brackets for 2022.
“It wouldn’t make sense to tax the first dollar earned by an indigent person at the same rate that we tax the last dollar Bill Gates earns, because the indigent person needs the dollar more than Bill Gates does,” says Alex Reid, tax-exempt organizations and charitable giving team leader at the law firm BakerHostetler. “Economists say that the first dollar has more utility than the billionth dollar because the first dollar is needed for essential items like food, shelter, and medicine.”
Progressive tax rates are an attempt to take the same amount of utility from each taxpayer, which many believe to be the fairest way to distribute the tax burden, says Reid.
Here are the individual tax brackets for the 2022 tax year:
Single filer
Taxable income | Tax owed |
Not more than $10,275 | 10% of the taxable income |
Over $10,275 but not over $41,775 | $1,027.50 plus 12% of the amount over $10,275 |
Over $41,775 but not over $89,075 | $4,807 plus 22% of the excess over $41,775 |
Over $89,075 but not over $170,050 | $15,213.50 plus 24% of the excess over $89,075 |
Over $170,050 but not over $215,950 | $34,647 plus 32% of the the excess over $170,050 |
Over $215,950 but not over $523,900 | $49,335.50 plus 35% of the excess over $215,950 |
Over $539,900 | $162,718 plus 37% of the excess over $539,000 |
Married filing separately
Taxable income | Tax owed |
Not over $10,275 | 10% of the taxable income |
Over $10,275 but not over $41,775 | $1,027.50 plus 12% of the excess over $10,275 |
Over $41,775 but not over $89,075 | $4,807.50 plus 22% of the excess over $41,775 |
Over $89,075 but not over $170,050 | $15,213 plus 24% of the excess over $89,075 |
Over $170,050 but not over $215,950 | $34,647.50 plus 32% of the the excess over $170,050 |
Over $215,950 but not over $323,925 | $49,335.50 plus 35% of the excess over $215,950 |
Over $323,925 | $87,126.75 plus 37% of the excess over $323.925 |
Married filing jointly
Taxable income | Tax owed |
Not over $20,550 | 10% of the taxable income |
Over $20,550 but not over $83,550 | $20,055 plus 12% of the excess over $20,550 |
Over $83,550 but not over $178,150 | $9,615 plus 22% of the excess over $83,550 |
Over $178,150 but not over $340,100 | $30,427 plus 24% of the excess over $178,150 |
Over $340,100 but not over $431,900 | $69,295 plus 32% of the excess over $340,100 |
Over $431,900 but not over $647,850 | $98,671 plus 35% of the excess over $431,900 |
Over $647,850 | $174,253.50 plus 37% of the excess over $647,850 |
Head of household
Taxable income | Tax owed |
Not over $14,650 | 10% of the taxable income |
Over $14,650 but not over $55,900 | $1,465 plus 12% of not over the excess over $14,650 |
Over $55,900 but not over $89,050 | $6,415 plus 22% of the excess over $55,900 |
Over $89,050 but not over $170,050 | $13,708 plus 24% of the excess over $89,050 |
Over $170,050 but not over $215,950 | $33,148 plus 32% of the the excess over $170,050 |
Over $215,950 but not over $539,900 | $47,836 plus 35% of the excess over $215,950 |
Over $539,900 | $161,218.50 plus 37% of the excess over $539,900 |
How tax brackets work
Taxable income is divided into applicable brackets working up from zero, and the rate is applied to the income that falls within the range of each bracket to arrive at the total tax, explains Jim Daniels, a certified public accountant and managing director at UHY Advisors, a tax and consulting services firm.
While there are seven tax brackets for individual income for 2022, corporate income is subject to a flat 21% tax rate.
Remember, you won’t be taxed on your full income. You can itemize deductions, listing them one at a time, or opt for a standard deduction. The 2022 standard deduction for married couples filing jointly is $25,900, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950, up $400. For heads of households, it’s $19,400, up $600.
When talking about federal income taxes, you’ll often hear the terms marginal tax rate and effective tax rate in reference to how much tax you owe based on your annual earnings and tax bracket. Here’s what each of them means:
- Marginal tax rate: This is the amount of tax charged on the last dollar of your income. For example, if you’re a single filer with $200,000 in taxable income for 2022, the highest bracket your income would fall into is 32%. That’s the rate at which your last dollar would be taxed and is referred to as your marginal tax rate.
- Effective tax rate: The effective tax rate is the actual percentage of federal taxes payable on the entirety of your taxable income. This is usually lower than your marginal tax rate. You determine it by dividing your federal tax liability by your taxable income.
Effective and marginal tax rates are useful to calculate because they account for the multiple layers of taxes (such as the income tax and payroll tax) alongside relevant deductions and credits, says Reid.
The bottom line
Taxes are complicated, but having a better understanding will help you assure you are paying only what you truly owe. The federal income tax system is intended to protect the less privileged and ensure the more privileged pay a minimum amount of taxes. Deductions of all kinds can lower the amount we are taxed.
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