What Is Income Tax?

Learn how income tax works.

Although you might cringe at the thought of paying taxes on your hard-earned income, taxes are what keep the federal government in business, paying for the services you rely on. For the U.S. federal government, a majority of the revenue comes from income taxes. To understand what income tax is and how it works, take a look at this breakdown. Even though you have to pay taxes, there are ways to reduce your tax bill by thousands of dollars.

What Is Income Tax?

Income tax is a tax imposed by the IRS on the annual earnings of individuals, corporations, trusts and other legal entities. That means anyone — person or business — with a form of income is subject to pay a piece of what they made over the prior year to the government. Even if you win the lottery, or win big on your favorite game show, the government takes a portion of that as income tax.

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And what are federal taxes used for exactly? The government uses all that money to pay for big federal programs including Social Security, defense and security, and major health programs such as Medicare and Medicaid.

Related: Learn How to Maximize Your Social Security Income

The History of U.S. Federal Income Taxes

The federal income tax history goes all the way back to the Civil War. In the 1860s Congress was short on money to fund Civil War expenses and thus imposed an income tax, which was later repealed. In 1894, a flat rate federal income tax was enacted, but it was later ruled unconstitutional. As a result, in 1913 Congress passed the 16th Amendment, which legally gave the government the power to collect taxes on incomes “from whatever source derived.”

Who Pays Income Taxes?

Although the government imposes an income tax, not everyone pays this tax equally, or even at all. If you want to know what is the income tax rate, take a look at your tax bracket.

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2018 Tax Brackets and Rates 
Rate For Unmarried Individuals, Taxable Income Over: For Married Individuals Filing Joint Returns, Taxable Income Over:
For Heads of Households, Taxable Income Over:
10% $0 $0 $0
12% $9,525 $19,050 $13,600
22% $38,700 $77,400 $51,800
24% $82,500 $165,000 $82,500
32% $157,500 $315,000 $157,500
35% $200,000 $400,000 $200,000
37% $500,000 $600,000 $500,000

When it comes to individual income taxes, the amount of taxes you pay is based on your income bracket. For instance, if you are an unmarried individual and have an income up to $9,525, 10 percent of your earnings will be collected as tax. However, if you make more than $500,000 as an unmarried individual or head of household, the government will collect 37 percent of your earnings.

State Income Taxes

If you live in some select states, you won’t have to pay state income taxes on top of your federal income taxes. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don’t impose income taxes. Only South Dakota and Wyoming don’t impose corporate income or gross receipts taxes.

Income Tax Deductions

The IRS allows you to subtract from the amount of taxes you owe with qualified tax deductions. For instance, you can potentially deduct for work-related expenses, charitable contributions, home mortgage interest, real estate tax and more. Make sure to take advantage of these commonly missed tax deductions.

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You can also elect to take the standard deduction. The standard deduction is a flat amount the federal government allows you to deduct based on your filing status. As part of the new tax law, the standard deduction increased.

Standard Deduction Rates
Filing Status
2017 Deduction Amount
2018 Deduction Amount 
Single $6,350 $12,000
Married Filing Jointly $12,700 $24,000
Head of Household $9,350 $18,000

Click through to see 50 tax deductions you didn’t know about.

More on Tax Laws

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About the Author

Taylor Bell

Taylor Bell is an Los Angeles-based journalist and staff writer for GOBankingRates covering personal finance. She is a former staff writer for ATTN: and has covered topics ranging from trending pop culture news to women’s social issues.

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What Is Income Tax?
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