What Is Federal Income Tax (¿Qué Es y Cómo Funciona)?

The federal income tax is a key revenue source for the U.S. government, funding programs like Social Security, defense, and public infrastructure. It applies to individuals, businesses, and other entities, with rates varying based on income and filing status.

Who Must File

Filing requirements depend on income, age, and dependency status. The IRS sets annual income thresholds to determine who must file. For 2024, single filers under 65 must file if their gross income exceeds $14,600, while those 65 and older must file if they earn more than $16,550. Married couples filing jointly must file if their combined income exceeds $29,200 if both spouses are under 65, or $30,700 if one spouse is 65 or older. These thresholds adjust annually for inflation.

Dependents follow different rules. A dependent must file if their unearned income (dividends, interest) exceeds $1,250 or if their earned income (wages, salaries) surpasses $13,850. If they have both earned and unearned income, they must file if their total income exceeds the larger of $1,250 or their earned income plus $400. These rules prevent high-income dependents from shifting income to lower-taxed individuals.

Self-employed individuals must file if they earn at least $400 in net self-employment income, as they are subject to self-employment tax, which covers Social Security and Medicare contributions. Gig workers, freelancers, and small business owners often fall into this category.

Filing Status Categories

A taxpayer’s filing status affects tax rates, deductions, and credit eligibility. The IRS recognizes five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse.

Single filers are those who are unmarried, divorced, or legally separated as of the last day of the tax year. This status generally results in higher tax rates than joint filing but allows access to the standard deduction of $14,600 for 2024.

Married couples can file jointly or separately. Joint filing typically provides lower tax brackets and access to credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit. Filing separately may be beneficial if one spouse has significant medical expenses or student loan payments based on adjusted gross income. However, separate filers lose access to many deductions and credits, including education-related tax benefits.

Head of Household status applies to unmarried individuals who pay more than half the cost of maintaining a home for a qualifying dependent. This status offers a larger standard deduction ($21,900 for 2024) and lower tax rates than single filing. To qualify, the dependent must be a child, parent, or relative meeting IRS criteria, and the filer must provide primary financial support.

Qualifying Surviving Spouse status applies to widows or widowers with a dependent child. It allows them to use the same tax rates and standard deduction as Married Filing Jointly for up to two years after their spouse’s death.

Total Taxable Income

Taxable income starts with gross income, which includes wages, salaries, business earnings, rental income, capital gains, dividends, and interest. Some income sources, such as municipal bond interest or certain Social Security benefits, may be tax-exempt, but most earnings are taxable. All income must be reported, even if not documented on a W-2 or 1099.

Investment income, including capital gains and dividends, affects taxable income. Short-term capital gains—profits from assets held for one year or less—are taxed at ordinary income rates, up to 37% in 2024. Long-term capital gains, from assets held longer than a year, are taxed at 0%, 15%, or 20%, depending on total income. Qualified dividends, which meet IRS holding period and source requirements, are taxed at these lower rates, while ordinary dividends are taxed as regular income.

Business owners and independent contractors must report net business income after deducting allowable expenses. This income is subject to both income tax and self-employment tax. Rental property owners report tenant income but can offset taxable amounts with deductions for depreciation, mortgage interest, and expenses. Passive income rules may limit losses for rental or investment activities.

Deductions and Credits

Taxpayers can reduce taxable income through deductions or lower their tax bill with credits. Deductions reduce the amount of income subject to taxation, while credits directly offset tax owed.

Taxpayers can take the standard deduction or itemize. The standard deduction for 2024 is $14,600 for single filers, $21,900 for heads of household, and $29,200 for married couples filing jointly. Itemizing is beneficial when deductible expenses exceed these amounts. Common itemized deductions include mortgage interest (capped at $750,000 of acquisition debt), state and local taxes (limited to $10,000), and medical expenses exceeding 7.5% of adjusted gross income. Charitable contributions are deductible up to 60% of AGI for cash donations to qualified organizations.

Tax credits provide a dollar-for-dollar reduction in tax liability. The Child Tax Credit is worth up to $2,000 per qualifying child under 17, with $1,600 refundable for 2024. The American Opportunity Credit offers up to $2,500 per student for higher education expenses, with 40% refundable. The Lifetime Learning Credit provides up to $2,000 for tuition and fees but is nonrefundable. Energy-efficient home improvements and electric vehicle purchases may also qualify for credits under the Inflation Reduction Act.

Withholding and Estimated Payments

Taxpayers must pay taxes throughout the year through withholding from wages or estimated payments for non-traditional income sources.

Employers use Form W-4 to determine how much federal income tax to withhold from employee paychecks. The amount depends on income, filing status, and any adjustments made by the employee. Those with multiple jobs or significant deductions may need to update their W-4 to ensure accurate withholding. The IRS provides a Tax Withholding Estimator to help taxpayers adjust their withholdings.

Self-employed individuals, gig workers, and those with substantial investment income must make estimated tax payments quarterly using Form 1040-ES. Payments are due in April, June, September, and January of the following year. Underpayment penalties apply if taxpayers fail to pay enough throughout the year. The IRS safe harbor rule allows taxpayers to avoid penalties if they pay at least 90% of their current year’s tax liability or 100% of the prior year’s tax, increasing to 110% for high-income earners.

Penalties for Filing Inaccurately

Errors on a tax return can lead to penalties, ranging from late filing fees to fraud charges.

Failing to file on time results in a penalty of 5% of the unpaid tax per month, up to 25%. If a return is more than 60 days late, the minimum penalty is either $485 or 100% of the unpaid tax, whichever is lower. The failure-to-pay penalty is 0.5% per month and continues accruing until the balance is settled. Interest compounds daily at the federal short-term rate plus 3%.

Underreporting income or claiming false deductions can trigger accuracy-related penalties of 20% of the underpaid tax. If fraud is involved, the penalty increases to 75%. In extreme cases, tax evasion can lead to criminal prosecution, fines, and imprisonment. Taxpayers who discover errors after filing can submit an amended return using Form 1040-X to correct mistakes and minimize penalties.

Refunds or Balances Due

Once a tax return is processed, the IRS determines whether the taxpayer is owed a refund or has a balance due.

Refunds occur when total payments exceed tax liability. The IRS issues refunds via direct deposit or paper check, typically within 21 days for electronically filed returns. Taxpayers can track their refund status using the “Where’s My Refund?” tool on the IRS website. Some adjust their withholdings to reduce overpayments, preferring more take-home pay rather than a large refund.

If a balance is due, payment options include electronic funds transfer, credit or debit card payments, or mailing a check. The IRS offers installment agreements for those unable to pay in full, with interest and penalties continuing to accrue. Short-term payment plans are available for balances under $100,000, while long-term plans apply to amounts up to $50,000. Taxpayers facing financial hardship may qualify for an Offer in Compromise, allowing them to settle for less than the full amount owed.