The IRS operates seven federal income tax brackets in 2025, from 10% to 37%. Add Social Security, Medicare taxes, and state income tax and the picture gets complex fast. Here is everything you need to understand how US federal income tax works — clearly explained with worked examples.
The United States federal income tax system is administered by the Internal Revenue Service (IRS). Like Australia and the UK, the US uses a progressive tax system — meaning higher income is taxed at higher rates, but only on the income within each bracket.
The US tax year follows the calendar year — 1 January to 31 December. Most employees have federal income tax withheld from each paycheck through the withholding system based on their W-4 form. The annual tax return (Form 1040) is typically due by 15 April of the following year.
A key difference from Australia and the UK: the US tax system starts with gross income, from which you subtract adjustments to reach Adjusted Gross Income (AGI), then subtract either the standard deduction or itemised deductions to reach taxable income. The brackets then apply to taxable income — not gross income.
US federal income tax brackets for 2025, adjusted for inflation by the IRS:
| Tax Rate | Taxable Income Range | Tax Owed |
|---|---|---|
| 10% | $0 – $11,925 | 10% of taxable income |
| 12% | $11,926 – $48,475 | $1,192.50 + 12% over $11,925 |
| 22% | $48,476 – $103,350 | $5,578.50 + 22% over $48,475 |
| 24% | $103,351 – $197,300 | $17,651 + 24% over $103,350 |
| 32% | $197,301 – $250,525 | $40,199 + 32% over $197,300 |
| 35% | $250,526 – $626,350 | $57,231 + 35% over $250,525 |
| 37% | Over $626,350 | $188,769.75 + 37% over $626,350 |
| Tax Rate | Taxable Income Range |
|---|---|
| 10% | $0 – $23,850 |
| 12% | $23,851 – $96,950 |
| 22% | $96,951 – $206,700 |
| 24% | $206,701 – $394,600 |
| 32% | $394,601 – $501,050 |
| 35% | $501,051 – $751,600 |
| 37% | Over $751,600 |
Source: IRS Revenue Procedure 2024-40 (2025 tax year inflation adjustments). These are general educational figures. Always verify current rates at irs.gov for your filing situation.
The standard deduction is subtracted from your gross income before applying the tax brackets. For 2025:
This means a single filer earning $50,000 does not pay tax on the first $15,000 — their taxable income is $35,000, and the brackets apply to that amount. You can instead choose to itemise deductions (mortgage interest, charitable donations, state taxes up to $10,000 SALT cap, etc.) if your itemised total exceeds the standard deduction — but most taxpayers take the standard deduction.
FICA (Federal Insurance Contributions Act) taxes fund Social Security and Medicare. They apply in addition to federal income tax:
| Tax | Employee Rate | Wage Base Limit 2025 |
|---|---|---|
| Social Security | 6.2% | $176,100 (stops above this) |
| Medicare | 1.45% | No limit |
| Additional Medicare | 0.9% | Above $200,000 (single) |
Employers match the 6.2% Social Security and 1.45% Medicare contributions — so the total FICA cost to employ someone is 15.3% of wages up to the SS wage base. Self-employed individuals pay both sides (15.3%) but can deduct half as a business expense.
In addition to federal income tax, most US states levy their own income tax. This adds 0–13.3% to your total tax burden depending on state of residence:
| Category | States | Rate Range |
|---|---|---|
| No income tax | Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska | 0% |
| Flat rate | Colorado, Illinois, Michigan, Pennsylvania | 3–4.95% |
| Progressive rates | California, New York, Oregon, New Jersey | Up to 13.3% |
California's top marginal rate of 13.3% (on income above $1 million) combined with the federal 37% rate and Medicare surcharge creates effective marginal rates above 50% for very high earners in that state. State income tax is generally deductible on federal returns, subject to the $10,000 SALT (State and Local Tax) deduction cap introduced in 2017.
Capital gains — profits from selling investments — are taxed at preferential rates in the US if held for over one year (long-term). Short-term gains (held under one year) are taxed as ordinary income at your federal rate.
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $48,350 | $48,351 – $533,400 | Over $533,400 |
| Married Filing Jointly | Up to $96,700 | $96,701 – $600,050 | Over $600,050 |
The 3.8% Net Investment Income Tax (NIIT) applies to net investment income for taxpayers above certain AGI thresholds ($200,000 single, $250,000 MFJ), effectively adding to the capital gains rate for higher earners.
Tax-advantaged retirement accounts are a major part of US financial planning education. The two main types:
For educational information on retirement accounts, visit irs.gov/retirement-plans.
Your marginal rate is the rate applied to your highest dollar of income. Your effective rate is your total federal income tax divided by gross income. A single filer on $100,000 has a marginal rate of 22% but an effective rate of approximately 13.8% — because the lower brackets apply to the first portions of income. FICA taxes add further to the total effective rate.
No. Seven states — Texas, Florida, Nevada, Washington, Wyoming, South Dakota, and Alaska — have no state income tax on wages. New Hampshire taxes only interest and dividend income. The remaining 43 states and DC impose some form of income tax, ranging from flat rates around 3% (Pennsylvania, Colorado) to progressive rates reaching 13.3% in California.
Form W-4 tells your employer how much federal income tax to withhold from each paycheck. Submitting an incorrect W-4 can result in underwithholding (you owe a large sum at tax time with potential penalties) or overwithholding (you get a large refund — which means the IRS held your money interest-free all year). Review your W-4 whenever your life circumstances change — marriage, divorce, having children, or taking a second job.