How Your Tax is Calculated — United States
US federal income tax is calculated progressively using marginal rates. Tax is withheld from paychecks throughout the year and reconciled when you file your annual return. State income taxes (where applicable) are calculated separately.
How Your Tax is Calculated
US federal income tax is calculated progressively using marginal rates. Tax is withheld from paychecks throughout the year and reconciled when you file your annual return. State income taxes (where applicable) are calculated separately.
Calculate Gross Income
Sum all income sources: wages (W-2), freelance/self-employment (1099), interest, dividends, capital gains, rental income, retirement distributions, and other income. This is your total gross income.
Calculate Adjusted Gross Income (AGI)
Subtract above-the-line deductions from gross income: 401(k), IRA, and HSA contributions, student loan interest, self-employment tax deduction, health insurance premiums for self-employed. AGI determines eligibility for many credits and deductions.
Subtract Standard or Itemized Deduction
Choose the greater of standard deduction ($16,100 single / $32,200 joint) or total itemized deductions (SALT, mortgage interest, charity, medical expenses). This gives your taxable income.
Apply Federal Tax Brackets
Tax calculated progressively: 10% on first $12,400; 12% on $12,401–$50,400; 22% on $50,401–$105,700; 24% on $105,701–$197,300; 32% on $197,301–$258,600; 35% on $258,601–$640,600; 37% above $640,600 (single filer rates).
Subtract Tax Credits
Apply tax credits to reduce tax owed: Child Tax Credit, EITC, education credits, etc. Credits are more valuable than deductions - they reduce your tax bill dollar-for-dollar. Refundable credits can result in a refund even if you owe no tax.
Add FICA Taxes
Social Security (6.2% up to $184,500) and Medicare (1.45% + 0.9% surtax above $200K) are calculated separately from income tax. Total FICA: 7.65% for most employees. These are withheld from each paycheck.
Calculate Net Pay
Gross salary minus federal income tax, FICA taxes, and state/local income taxes (if applicable) equals your take-home pay. Compare total withholding to actual tax owed - difference is your refund or amount due.
Example Calculation ($75,000 annual salary, single filer)
This example shows federal taxes only. State income tax (0-13.3% depending on state) would further reduce take-home pay. Does not include potential tax credits. 401(k) contribution reduces taxable income but also reduces take-home pay.
Calculate Your Tax in United States
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Social Security & Medicare (FICA)
The US social insurance system is funded through FICA (Federal Insurance Contributions Act) taxes, covering Social Security (retirement, disability, survivors) and Medicare (healthcare for 65+). Contributions are mandatory for all W-2 employees and self-employed individuals. The system is funded jointly by employees and employers.
02Tax Deductions and Credits
The US tax system offers two paths for deductions: the standard deduction or itemized deductions. Tax credits directly reduce tax owed and are generally more valuable than deductions. The OBBBA (2025) made permanent most deduction provisions from the 2017 Tax Cuts and Jobs Act.
04Capital Income & Investment Taxation
The US taxes capital gains and investment income separately from ordinary income, with preferential rates for long-term holdings. The 3.8% Net Investment Income Tax (NIIT) applies to high earners. The US has a federal estate tax but no wealth tax.
05Special Features of the US Tax System
The US tax system has unique features that distinguish it from most other countries: citizenship-based taxation, a complex federal-state-local structure, extensive retirement savings incentives, and no national VAT or sales tax.
06Tax Filing and Compliance
The US operates a self-assessment tax system where individuals are responsible for filing annual tax returns. Employers withhold estimated taxes from paychecks, and annual returns reconcile withholding with actual tax liability. Electronic filing is standard and covers federal and state returns.