How much of your income goes to federal tax depends on your federal tax rate, as well as your deductions and credits. The federal tax system is generally a progressive tax, meaning income tax rates increase as you make more money. Certain types of income, such as capital gains, are taxed at different rates than ordinary income.
How much you pay in federal tax depends on how much you made, how much you can claim in deductions and credits and what types of income you had.
Federal Income Tax Percentage Factors
How much you pay in federal income tax depends on a few different factors.
One of the most important factors is how much money you made. Tax brackets have shifted over the years, but the United States has stuck to a progressive system of income tax rates, meaning that as your income increases, the percentage of each additional dollar of income going to taxes rises. You can find tax tables online or in Internal Revenue Service publications to determine your federal bracket.
As of 2018, the highest marginal federal tax rate is 37 percent on income above $500,000. Even if you're in this tax bracket, you won't actually pay 37 percent of your income in taxes, because your first $500,000 in income will be taxed at lower levels.
In addition to income, tax deductions and credits that you're eligible for are also a determining factor in how much you'll ultimately pay to the IRS. Tax deductions decrease the amount of your income considered for tax purposes and tax credits offset taxes due on a dollar-for-dollar basis.
Common tax deductions include deductions for state and local taxes you may have paid, deductions for mortgage interest in your home, deductions for self-employed business expenses and deductions for student loan interest.
To claim certain deductions, you must itemize your deductions rather than take the IRS standard deduction. This is only worth doing if your itemized deductions will be more than what the standard deduction would deliver.
Common credits include the earned income tax credit for low-income taxpayers, the child and dependent care tax credit for people with children and other dependents, the premium tax credit available for health insurance costs and various energy-related credits.
Capital Gains Tax
Not all income is taxed at ordinary income tax rates. Long-term capital gains income, which you generally get from selling assets like stocks, bonds or property that you've held on to for a year or longer, is taxed at a lower percentage. You can deduct capital losses if you sell such assets for a loss.
The maximum tax level for long-term capital gains is 20 percent, while most taxpayers pay 15 percent. If more of your income is from capital gains, this can mean that you pay less of your income in taxes than you would if it were ordinary income.
2018 Tax Law Changes
The 2018 tax year is bringing big changes to tax brackets and available deductions thanks to the Tax Cuts and Jobs Act, which was signed into law in December 2017. The highest tax bracket is now 37 percent, down from 39.6 percent, and the income levels for the different tax brackets have also changed.
The standard deduction is also increasing to $12,000 for single filers, $18,000 for people filing as head of household and $24,000 for married couples filing jointly, meaning there will be less incentive to itemize for many taxpayers and higher deductions for others. Some deductions, including unreimbursed employee expense deductions, are being eliminated. Capital gains rates are largely unchanged.
2017 Tax Law Situation
For 2017, tax bracket rates are generally higher than in subsequent years. The standard deduction is $6,350 for single filers, $12,700 for married couples filing jointly and $9,350 for those filing as head of household.