how federal income tax works
tax is collected from individuals and corporations by the city state or country where they reside or operate when the tax collected is credited to the country s government it is referred to as a federal tax governments use the money collected through federal taxes to pay for the growth and upkeep of the country some look at federal tax as rent charged to live in a country or the fee to use the resources provided by a country when you pay tax to the u s government you re investing in your economy as the government uses the funds to do the following 5in fiscal year 2023 the u s government collected 4 44 trillion in revenue and spent 6 13 trillion resulting in a 1 70 trillion deficit 7the largest source of revenue for the federal government comes from the income of its residents 4in fiscal year 2022 the latest data available the irs collected over 4 9 trillion in receipts of which individuals estates and trusts contributed 2 9 trillion meanwhile business income taxes accounted for about 476 billion 8types of taxable incomemany different types of income are taxable in addition different forms of income may be assessed at different tax rates generally speaking there are two types of income earned income and unearned income earned income is income primarily generated by being employed by an employer including if you are self employed the most common forms of earned income are 9unearned income is income primarily generated by more passive forms of activity especially surrounding investing the most common forms of unearned income are 10gross income vs net incomeworkers receive their earnings either as net income also known as take home pay or gross income net income is the total amount received after taxes benefits and voluntary contributions are deducted from the paycheck when taxes are withheld it means the company or payer has paid the tax to the government on the worker s behalf the amount your employer withholds for taxes depends on how much you earn and the information you gave your employer on form w 4 11 all money earned whether as a wage salary cash gift from an employer business income tips gambling income bonuses or unemployment compensation constitutes income for federal tax purposes 12filing federal income taxesfederal income taxes are reported and remitted to the irs through a series of forms created by the u s department of treasury the primary form used to report federal income taxes is form 1040 which collects not only your personal information but your income and tax benefit activities for the year there are several variations of form 1040 based on the type of activity incurred by the taxpayer over the prior year an example of the first page for form 1040 sr is below all pages of form 1040 sr are available on the irs website investopediaif a taxpayer has more information to submit to the irs they usually attach or provide additional forms for example if you decide to claim an itemized deduction discussed below you are required to submit schedule a to support your return 13 many tax credits also discussed below require additional forms federal income tax bracketsthe federal income tax is built on a progressive tax system where higher income earners are taxed at higher rates the tables below show the tax brackets and rates for 2023 and 2024 1415