Federal taxes are the financial contributions required by the U.S. government from individuals and businesses. These taxes help fund essential government programs and services, such as infrastructure, education, and national defense. There are different types of federal taxes, including income tax, payroll tax, and excise tax. Income tax is levied on the earnings of individuals and businesses. Payroll tax is a combination of Social Security and Medicare taxes, which are deducted from employees’ paychecks. Excise taxes are levied on specific goods and services, such as alcohol, tobacco, and gasoline. Understanding these taxes is crucial for fulfilling your financial obligations and contributing to the funding of government operations.
Federal Income Taxes
The primary federal taxes we pay are income taxes. These taxes are levied on the taxable income of individuals, businesses, and other entities. Taxable income is determined by subtracting allowable deductions and exemptions from gross income.
- Individual Income Taxes: Individuals are taxed on their wages, salaries, self-employment income, investment income, and other forms of income.
- Corporate Income Taxes: Corporations are taxed on their net income, which is their gross income minus allowable deductions and expenses.
- Pass-Through Entity Taxes: Pass-through entities, such as partnerships and S corporations, are not themselves subject to income tax. Instead, their income is “passed through” to the individual owners or shareholders, who then report it on their individual tax returns.
Tax Brackets
Individual income taxes are levied based on graduated tax brackets. The tax rates increase as taxable income increases. The current federal income tax brackets for single individuals are as follows:
| Tax Bracket | Tax Rate |
|---|---|
| 10% | Up to $10,275 |
| 12% | $10,275 – $41,775 |
| 22% | $41,775 – $89,075 |
| 24% | $89,075 – $170,050 |
| 32% | $170,050 – $215,950 |
| 35% | $215,950 – $539,900 |
| 37% | Over $539,900 |
Note that tax rates are subject to change and may vary depending on the taxpayer’s filing status (e.g., single, married filing jointly, etc.).
Payroll Taxes
Payroll taxes are a type of tax that is collected from employees’ wages or salaries. These taxes are used to fund Social Security and Medicare, which are government programs that provide benefits to retirees, disabled individuals, and their survivors.
Payroll taxes are typically withheld from employees’ paychecks by their employers. The amount of payroll taxes that is withheld depends on the employee’s taxable income and their filing status. Self-employed individuals are also responsible for paying payroll taxes, but they must make estimated tax payments to the IRS.
- Social Security tax is a 12.4% tax that is divided evenly between employees and employers. The maximum amount of Social Security tax that can be withheld from an employee’s paycheck is $8,236.44 in 2023.
- Medicare tax is a 2.9% tax that is also divided evenly between employees and employers. The maximum amount of Medicare tax that can be withheld from an employee’s paycheck is $2,029.80 in 2023.
- Additional Medicare tax is a 0.9% tax that is only paid by employees who earn more than a certain amount of money. The additional Medicare tax is not subject to the same wage base limits as Social Security and Medicare taxes.
| Tax | Rate | Maximum Withholding |
|---|---|---|
| Social Security | 12.4% | $8,236.44 |
| Medicare | 2.9% | $2,029.80 |
| Additional Medicare | 0.9% | n/a |
Excise Taxes
Excise taxes are levied on specific goods or services, such as tobacco, alcohol, and motor fuels. These taxes are often included in the price of the goods or services, so consumers pay these taxes indirectly.
- Tobacco taxes: These taxes are imposed on cigarettes, cigars, chewing tobacco, and other tobacco products.
- Alcohol taxes: These taxes are levied on beer, wine, and distilled spirits.
- Motor fuel taxes: These taxes are charged on gasoline, diesel fuel, and other fuels used to power vehicles.
- Telephone and wireless service taxes: These taxes are applied to telephone and wireless services.
- Highway usage taxes: These taxes are charged on heavy trucks and other vehicles that use federal highways.
Excise taxes are used to fund specific programs or projects. For example, the revenue from tobacco taxes is used to fund public health programs, while the funds from highway usage taxes are used to build and maintain federal highways.
| Tax | Rate |
|---|---|
| Cigarettes | $1.01 per pack |
| Beer | $18 per barrel |
| Gasoline | 18.4 cents per gallon |
Estate and Gift Taxes
Estate and gift taxes are imposed on the transfer of property from one person to another. Estate taxes are levied on the value of a person’s property at the time of their death. Gift taxes are levied on the value of property that is transferred during a person’s lifetime.
The estate tax is a progressive tax, meaning that the tax rate increases as the value of the estate increases. The current estate tax rates range from 18% to 40%. The gift tax is also a progressive tax, with rates ranging from 18% to 50%.
There are a number of exemptions and deductions that can reduce the amount of estate and gift taxes that are owed. For example, the estate tax exemption is currently $12.06 million for individuals and $24.12 million for married couples. The gift tax exemption is currently $16,000 per year per recipient.
- Estate taxes are levied on the value of a person’s property at the time of their death.
- Gift taxes are levied on the value of property that is transferred during a person’s lifetime.
- The estate tax is a progressive tax, meaning that the tax rate increases as the value of the estate increases.
- The gift tax is also a progressive tax, with rates ranging from 18% to 50%.
- There are a number of exemptions and deductions that can reduce the amount of estate and gift taxes that are owed.
| Tax Type | Tax Rate | Exemption |
|---|---|---|
| Estate Tax | 18% to 40% | $12.06 million |
| Gift Tax | 18% to 50% | $16,000 per year per recipient |