FEDERAL INCOME TAX: How is Federal income tax Calculated?

Federal Income Tax Brackets
Photo Credit: The balance

It’s only natural that, as a citizen of the US, you would be curious about what the federal income tax is all about. You might also be curious about how the federal income tax system works and what the tax levied on each individual is used for. In this article, we will be showing you how the federal income tax calculator works, what tax rates are, and how to determine income tax brackets in 2022.

Since it’s another tax year, everyone is concerned with everything tax related. Let’s dive right into it.

What is Federal Income Tax?

The federal income tax is one of the largest ways the US government generates its revenues. It is a tax levied annually on the income and earnings of every citizen in the US. Legal entities like trusts and corporations are also taxed. Everyone pays the same amount of taxes, no matter where they live or work in the country. Every individual is taxed based on how much they earn.

Federal income taxes are used for the provision of standard education, reliable health care systems, public transportation, building, and repair of public infrastructure in the country. Federal income tax is different from state income tax. State income taxes are taxes levied on an individual by the State he/she resides in.

In the United States, federal income tax is usually progressive, which means as an individual’s income goes up (increases), so does his or her tax also increase. Federal income rates are taxed at various ranges, and these are called brackets.

Federal income tax ranges from 10% -37% of an individual’s taxable income. Companies based outside the US that earn money in the US may also be subject to federal income tax. The federal tax applies to royalties, and dividends amongst income of foreign organizations are not linked with the US trade 30%, this percentage is usually reduced under the tax treaties. These treaties make it possible to tax business income up to a certain limit and to tax investment returns at a lower rate.

How Does Federal Income Tax Work?

The pattern in which federal income works is quite straightforward. You either pay these taxes as a form of withholding or as estimated tax payments. Failure to pay these taxes carries a penalty. These taxes are deducted from your income and paid to the federal government. Some of the methods in which these taxes included :

  • Tax withholding
  • Estimated tax payments

#1. Tax Withholding 

As a worker, your employer takes out the amount of tax you should pay and sends it to the IRS in your name. It’s important to note here that the amount your employer deducts is dependent on how much you earn.

One of the reasons why employers use the tax withholding method is that it helps in the prevention of tax evasion and also to avoid having to send out huge amounts in tax at the end of the year, this might result in running on losses on the part of employers. This rule is also binding on non-resident aliens who work in the US.

#2. Estimated Tax Payments 

As an entrepreneur, you would need to make tax payment estimates. This category of taxpayers falls under those who are not subject to withholding tax or the pay-as-you-go rule. Payments made to the IRS as federal income tax is a form of giving back to society.

Funds gotten from citizens are used to build the economy, so, in a way, you are helping to make the economy a better place to live in.

In 2021, the total amount gotten by the IRS from individuals who live and work in the US amounted to $4.05 trillion in revenue and spent $6.82 trillion, which resulted in a $2.77 trillion deficit. Some of the things the US government does with the money it gets from the IRS are::

  • Building and maintenance of infrastructures.
  • Embarking on a space expedition.
  • Development of the healthcare sectors.
  • Improving transportation.
  • Funding the Educational sector.

Federal Income Tax Rates

Federal income tax rates are the percentage each individual, corporation, or entity is expected to pay to the government in the form of taxes for the betterment of every individual living and working in that nation.

The tax rate of individual increases as his or her income increases. The tax rate that each person pays depends on where they fall in the marginal tax brackets. Marginal tax brackets are the percentage that is deducted from every taxable income that exceeds a pre-defined income limit.

The US government uses a progressive marginal tax rate, that is to say, your tax increases as your income increases. It’s important to remember that tax rates don’t just apply to income and corporate returns; they also apply when taxes are due. Some of them include sales tax and long-term capital gains.

In determining how much federal income tax rate you would pay, you should consider your filing status and how much taxable income you report for that year. You can use tax brackets to figure out how much you should pay for the year in question. For better understanding, try dividing the amount you paid in tax by your taxable income.

Federal Income Tax Calculator

The United States has a progressive income tax system. Instead of all your income being taxed at the same rate, it is split into parts called tax brackets and taxed at rates between 10% to 37% fit those with higher incomes.

This method may seem unnecessarily Complex but it’s beneficial for low-income taxpayers, who end up paying a smaller portion of their total income in taxes than those who earn more.

Calculating your financial tax liability is a multiple-step process that begins with adding up all your earnings for the year.

From there you can make a selection of “above the line” deductions, such as Contributions to a qualifying retirement plan or the amount of interest you paid on a student loan to get to your Adjusted Gross Income or AGI. 

You can reduce your AGI by taking the standard deduction or itemizing your deductions. The standard deduction is a fixed amount for your enrollment status. Most people are better off taking the standard print because it is more than their total individual prints.

This is the amount you apply to the tax bracket to calculate your federal tax liability. You can claim tax credits to further reduce your bill. If all this sounds like a lot of legwork, the federal income tax calculator is there for just this purpose.

Federal Income Tax Bracket for 2022

The federal income tax brackets for 2022 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The US federal income tax employs the marginal tax rate system which is based on an individual’s earnings (taxable income). The IRS adjusted some provisions in the revenue procedures which are effective until 2045. These changes apply to tax returns filed in 2023. They include:

  1. Deductions made for married couples who are filing jointly are $25.900, up $800 from the previous year. Single taxpayers and married couples filing separately notice that their deductions rise to $12.950 for the tax year 2022, up by $400. For heads of households, deductions are $19.400 up $600 for the tax year 2022.
  2. Transportation fringe benefits and parking benefits rise to $280 for the tax year 2022.

The Table Below Is a Representation of the Federal Income Tax Brackets and Tax Rates for the Year 2021 -2022

2022 Tax ratesSingle filersMarried filing jointlymarried filing separatelyheads of households
10%$0 to $10,275$0 to $29,550$10,275$14,650
12%$10,275 to $41,775$29,551 to $83,550$10,275 to $41,775$14,650 to $55,900
22%$41,775 to $89,075$83,551 to $178,550$41,776 to $89,075$55,901 to $89,050
24%$89,075 to $170,050$178,551 to $340,100$89,076 to $170,050$89,051 to $170,050
32%$170,050 to $215,950$340,101 to $431,900$170,051 to $215,950 $170,051 to $ 215, 951
35%$215,950 to $539,900$431,901 to $647,850$215, 951 to $323,925$215,951 to 539,900
37%Over $539,900Over $647,800Over $323,925Over $539,900 
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Source: Internal Revenue Service 

How Federal Tax Income Works

Let’s assume you are single and earned $90,000 in taxable income in 2021. If $90,000 is in the 24% tax bracket for singles, then we can assume that your tax bill for the tax year 2021 is 24% of $90,000 because it is in the tax bracket of 24% for singles? Nope, it does not work that way, instead, a certain amount is taxed at 24% while the rest of it is taxed at 10% rates.

Conclusion

This article talks about the various aspects of federal income tax, how it works, income rates, its brackets for 2022, and how you can effortlessly determine how much you will pay as tax in the next tax year by using its calculator. I hope you found it useful.

Federal Income Tax FAQs

How Do I Calculate My Federal Income Tax?

You can calculate your tax rate by dividing the total amount you paid in tax by your taxable income.

What is the Federal income tax for 2022?

The federal income tax brackets are about seven in number; 10%,20%,22% 24% 35%, and 37%. The higher you earn, the higher your income brackets will be.

What is Federal income tax?

Federal income tax is the tax that is levied on individuals who live and work in the U.S. Every individual that earns a living is expected to pay taxes to the government, which the government, in turn, uses in funding some of the major projects in the economy.

  1. HOW TO PAY LESS TAXES: Simple Ways to Pay Less Taxes Legally
  2. FIT TAX: What Is Fit Tax on My Paycheck?
  3. TAX LIABILITY: Definition and How It Works

References

https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022 https://en.m.wikipedia.org/wiki/Income_tax_in_the_United_States

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