Income Tax

Understanding how the income tax system works—and ways to minimize the amount you owe—is essential to financial planning. Learn about tax brackets, filing status, how to file taxes, and more.

Gross income is everything you get from all sources that aren’t specifically tax-exempt according to the IRS. Taxable income subtracts certain allowable income from your gross income to leave you with the income that is subject to taxes. Your tax bracket is based on taxable income, not gross income.

Generally, if you’re married and file jointly, you will pay less than a single person. Married people can file jointly or separately, singles can file as single or (if you support a qualifying person) as head of household. In a tax year when you lose your spouse, you can file as a qualifying widow(er).

Reasons your refund has gone missing can range from simple math errors on your return to identity theft and other tax scams. Or you might just be feeling the impact of an unusually high processing volume at the IRS. Start by checking the status of your refund on the IRS’s “Where’s My Refund?” page.

You can’t really owe zero unless you have no taxable income. But you can carefully calibrate your W-4 tax withholding to make sure that enough is taken out of your paycheck that you won’t have to write a check to the IRS at tax time.

The short answer is no. You’ll only pay additional taxes on the last few dollars you make that pushed you into the higher tax bracket; on lower amounts, your tax rates are lower. That is the magic of having a progressive tax system that uses marginal tax rates.

You can get a six-month tax extension simply by filing for it with the IRS, using IRS Form 4868. The most important rule is to file for that extension by income tax filing day, usually April 15—and to send in the tax amount you think you will owe so that you are not delinquent on your taxes and subject to a failure-to-file penalty.

Key Terms

Tax Bracket Taxable Income Tax Return Adjusted Gross Income (AGI) Tax Liability Modified Adjusted Gross Income (MAGI) Payroll Tax

Tax brackets are the income ranges subject to specified marginal tax rates. The U.S. currently has seven tax brackets, ranging from 10% to 37%. These are different depending on tax filing status: single, married filing jointly [and qualifying widow(er)s], married filing separately, and head of household. The U.S. tax system is progressive; lower brackets pay lower rates and higher brackets pay higher rates.

Taxable income is the portion of gross income used to calculate how much taxpayers owe in taxes in a given year. In general, it’s their adjusted gross income (AGI) minus allowable itemized or standard deductions. It includes wages, salaries, bonuses, and tips—plus investment income and various types of unearned income. It’s generally less than adjusted gross income because of deductions that reduce it.

A tax return consists of the documents filed with a tax authority that report your income, expenses, deductions, credits, and other relevant information used to calculate the taxes an individual or other entity owes. On the return, taxpayers calculate their tax liability, schedule tax payments, and can request refunds for overpayment of taxes.

AGI is calculated by taking specified tax-deductible expenses from your gross income to reach the figure on which your tax liability will be calculated. Among them are: alimony payments, retirement-plan contributions, educator expenses, early withdrawal penalties, HSA contributions, student loan interest, and self-employment tax and health insurance costs.

Tax liability is the payment owed by an individual, business, or other entity to a federal, state, or local tax authority. Income taxes, sales tax and capital gains tax are all forms of tax liability. Individuals and businesses can lower their tax liability by claiming deductions, exemptions, and tax credits.

Calculating the MAGI adds back in certain costs that are deducted from gross income to create the AGI. Among the items are IRA contributions, student loan interest deductions, excluded foreign income and half of self-employment tax.

Payroll taxes are percentages withheld from an employee’s pay by an employer who pays it to the government on the employee’s behalf. In the U.S., payroll taxes are used to fund Social Security and Medicare. Unlike income taxes, which go into the government’s general funds, payroll taxes are used for specific programs.

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