The federal government imposes several taxes that reduce net personal income from working, saving and investing. Tax rates vary depending on your total annual income, your tax filing status, your income sources and other factors. Tax deductions and credits can reduce the amount of income that goes to federal tax.
FICA taxes include Social Security and Medicare taxes on wages, salaries and self-employment income. When you earn income at a traditional job, your employer withholds a portion of your pay to cover your obligations to Social Security and Medicare.
The Social Security tax rate paid by for employees was 4.2 percent as of 2012, when it applied to a maximum of $110,100 of earned income. The Medicare tax rate for employees was 1.45 percent, with no income limit. Self-employed workers paid 10.4 percent to Social Security and 2.9 percent to Medicare.
The amount of your income that goes toward federal income tax depends on your tax filing status and annual income. For single taxpayers, the first $8,700 of income is subject to a 10 percent tax rate, income between $8,701 and $35,350 is taxed at 15 percent, income between $35,351 and $85,650 is taxed at 25 percent, and income between $85,651 and $178,650 comes under a 28 percent tax rate. Income between $178,650 and $388,351 is taxed at 33 percent, and income beyond that at 35 percent.
Compared with single filers, married couples filing joint returns and people who qualify for "head of a household" status can earn more income in the lower tax brackets before moving into higher brackets.
Capital Gains Tax
Federal income tax brackets apply to most sources of income, such as wages, salaries, self-employment income and interest. Capital gains -- profits you make when selling an asset that has increased in value -- are subject to different tax rules. If you hold an asset longer than a year before selling it, gains are subject to a long-term capital gains rate capped at 15 percent. If you sell an investment within a year of buying it, the gains are taxed at your normal income tax rate.
Excise taxes are levied on the sale of certain products or fees people incur for licenses and other government documents. The federal government imposes an excise tax of 18 cents per gallon on gasoline and 24.4 cents per gallon diesel fuel. The federal government also taxes beer at a rate of 5 cents per can and cigarettes at $1.01 per pack of 20.
The federal government offers a variety of tax breaks that can reduce the amount it takes. Even if you make more than $388,350 and face a maximum tax rate of 35 percent, your actual tax rate could be much lower if you are eligible for tax deductions and credits. Tax deductions and exemptions for dependents reduce your taxable income, which could drop you into a lower tax bracket. Tax credits directly reduce the total amount of income tax you owe, so claiming credits can reduce your tax obligation below the amount indicated by your tax brackets.
For example, a single person who earns $30,000 a year pays 5.65 percent of his income, or $1,695, toward FICA taxes. If this person qualifies for $10,000 in tax deductions, he pays income tax on $20,000. The first $8,700 is subject to a 10 percent tax rate, which amounts to $870 in income tax. The remaining $11,300 is taxed at 15 percent, adding another $1,695 to his tax bill. If the taxpayer pays no capital gains tax, excise taxes or other federal taxes, he pays a total of $4,260 --14.2 percent of his income -- in federal taxes.
- Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
- Internal Revenue Service: Topic 409 - Capital Gains and Losses
- Social Security Administration: 2012 Social Security Tax Rate and Maximum Taxable Earnings
- Bankrate.com: 2012 Tax Bracket Rates
- U.S. News and World Report: 3 Inconvenient Truths About Taxes
- USA Today: Gas Tax Falling Short in Paying for Transportation Needs
- Alcohol and Tobacco Tax and Trade Bureau: Tax and Fee Rate
- Alcohol and Tobacco Tax and Trade Bureau: Federal Excise Tax Increase and Related Provisions