Individual Federal Income Taxes

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 29, 2023

What Is An Income Tax?

An income tax is a tax that the government imposes on individuals or businesses that have earned income during the year. The amount of tax you owe is based on your income level and filing status.

If you are a US citizen or resident alien, you will need to file a return if your income is above a certain amount. This amount varies depending on your filing status, age, and whether you are claiming any dependents.

The tax brackets have changed since Congress passed new legislation in 2017 that altered the brackets and how taxes are submitted.

The top rate for five of the seven tax brackets was lowered as a result of President Trump and Congressional Republicans' tax reform. It also boosted the standard deduction to near-double its previous amount.

Who Is Required To File an Income Tax Return?

If you satisfy the filing requirements and are a citizen or resident of the United States (or reside in Puerto Rico), you must submit a tax return.

The three main factors that decide if a taxpayer needs to file a return are:

  • Your total income before taxes
  • Your filing status (single, married, etc.) will affect your taxes
  • Your age

Requirements for Gross Income

The following are included in gross income:

  • All taxable income received in the form of money, goods, property, and services.
  • Any money received from outside the United States
  • Exemptions on your primary home's sale income
  • Gains, but not losses, on the sale of personal belongings are included in taxable income.

There are various rules and criteria for each individual:

  • Dependents
  • Self-Employed
  • US citizens and resident aliens who live outside of the country
  • Deceased people
  • Native Puerto Rican
  • Income from the Northern Mariana Islands, US Virgin Island, and the Commonwealth of the Northern Mariana Islands

Status of Filing

  • Single (S)
  • Married Filing Jointly (MFJ)
  • Married Filing Separately (MFS)
  • Head of the Household (HH)
  • Qualifying Widow or Widower with a dependent child (QW)***

*Single: unmarried.

**: Head of Household if you are single and have a qualifying child

***The 1st and 2nd years after the year a spouse died and has a qualifying child.

There are a few more pieces to the return filing puzzle that have not been covered.

Exclusion and Dependency Exemption

Each person may claim one exemption. For example, if you file as Single, you are entitled to one exemption.

However, if two exemptions are what you are looking for because you are married and filing Married Filing Jointly, that is possible too--one for yourself and one for your spouse.

You can claim an exemption for each of your dependents if you have any. Each exemption was worth $3900 in 2013.

The total exemption amount lowers the taxes you owe.

Who Is Considered Your Dependent?

A dependent is someone you can claim on your tax return. Your spouse cannot be classed as a dependent. Your dependent has to match the requirements of being either a qualifying child or relative.

There are restrictions on who can be claimed as a dependent (see Appendix)

Documents Proving Income

Documents Proving Income

At the end of the year, you will get a W-2 or a 1099 Misc if you work for someone else. These forms provide an overview of your earnings for a specific year. Double-check your Social Security number (SSN) and name when you get your paychecks.

The IRS will refuse to accept your tax documents if incorrect information is entered.

W-2 Form

(Note the boxes on the example form below.)

Employers' and employees' information is generally found in the box A to F, such as the employer's name, address, ID number, your name, your address, and your Social Security number.

Boxes 1 and 2 contain your yearly income and the total tax withheld throughout the year.

There are two Forms W-2, Boxes 3-6, which include Social Security and Medicare payments and tax deductions.

Box 12 could contain different codes, which might yield various information such as elective deferrals (e.g., 401K), life term insurance, cafeteria plan, etc.

The second page of your W-2 will show the following components: Your State and Local income and tax withholdings.

The Form 1099-Misc

On form 1099 Misc, the employer and employee information is stated in the left column (name, ID, address), just as it is on a W-2. For those who are self-employed or work as independent contractors, your income for the year goes in Box 7.

The 1099-Misc is incredibly advantageous for independent contractors because it allows them to deduct any expenses related to their employment from their taxes.

The most significant disadvantage of a 1099-Misc is that the employer does not automatically take out tax withholdings.

The employer pays half of Social Security and Medicare contributions on a W-2, but the employee must pay those taxes in full on a 1099-MISC.

That is why individuals were compelled to pay SE tax (Social Security tax). No deductions are taken from each paycheck, so if you do not want to owe the IRS at year's end, it is preferable to pay quarterly estimated taxes.

Which Tax Form Should I Use?

There are several forms to choose from, and it might be challenging to figure out which one is appropriate for you. Many individuals are unfamiliar with which form to utilize. 1040 is the simplest form to use because it is the most flexible.

Anyone can complete this type of return, but there may be other forms that would better suit your needs if you want to get the most out of your tax refund.

1040 EZ, 1040 A, and 1040 are the three most common forms.

The 1040 NR and 1040 X are more advanced forms that will not be explained in this e-Book.

The form you will use depends on the severity of your return.

Many people believe their taxes are simple. To determine if the government agrees, here are some standards concerning filling out forms.

The 1040 EZ Form Is the Easiest Tax Form To File

Use this form only if ALL of the following apply:

  • If you are filing as a single or married filing jointly, select "S" or "MFJ."
  • You (and your spouse if MFJ) were under age 65 at the end of the year, and you did not become blind.
  • You do not claim any dependents on your taxes.
  • You have reached your tax income limit: for 2013, it is $100,000.
  • The only sources of income that count are wages, salaries, tips, unemployment compensation, taxable scholarship and fellowship grants, and taxable interest of $1,500 or less.
  • You do not deduct any income adjustments, such as IRA or student loan interest.
  • Except for EIC (Earned Income Credit), no credits have been applied.
  • You are not required to pay taxes on wages given to a household employee.
  • If you filed for Chapter 11 bankruptcy on or after 10/06/2005, you are not responsible for any outstanding debt.
  • To compute your income taxes, use the tax table.

For individuals who just have W-2s and Unemployment income and make use of the typical deduction only, this form is for you.

Any extra work, such as mortgage or property taxes, charity donations, medical costs, or business expenses incurred by employees are not factored into this formula.

The Standard and Itemized deductions are the two forms of tax deductions that can be used to reduce your taxable income. You must choose one of them. The 1040 EZ, 1040 A, and 1040 are all available for the Standard deduction.

If you itemize your deductions, it could provide greater benefits than the standard deduction.

Form 1040 A

The next best form to use if you are ineligible for 1040 EZ is 1040 A.

Please use this form only if you meet ALL of the requirements below (IRS Pub-17):

1. Only wages, salaries, and tips comprise your income.

  • Your wages, salaries, and tips
  • Interest
  • Standard dividends
  • The distribution of capital gains
  • Individual Retirement Account (IRA) distributions
  • Pensions and annuities
  • All social security and railroad retirement benefits that are taxable
  • Taxable scholarships and fellowships are generally excluded

2. You have a taxable income of less than $100,000.

3. The adjustments you make to income are only for the items listed below.

  • The cost of being an educator
  • Deductions on your IRA
  • Deduction for student loan interest
  • Tuition and fees

4. You do not list your deductions

5. Only the following tax credits are available to you (information on the IRS):

  • The deduction for child and dependent care costs is based on your income
  • The elderly or disabled credit
  • The education tax credit
  • The credit for retirement savings contributions
  • The child tax credit is a great way to save money on your taxes.
  • The earned income credit is a perk that many employed people are not aware of.
  • The extra child tax credit

6. You were not subject to the alternative minimum tax on stock you received from exercising an incentive stock option.

If you received employer-sponsored dependent care benefits or owe tax from the recoupment of an education credit or the alternative minimum tax, Form 1040 A is also available to you.

Form 1040

Who needs to file form 1040?

The last choice for filing your taxes if you cannot use form 1040 EZ or 1040 A is to file using form 1040.

  • All sources of income, deductions, and credits are reported using form 1040.
  • If you do not qualify for certain adjustments to your income on Form 1040 EZ or Form 1040 A, you can use form 1040 to calculate a lower taxable income and thus reduce your tax burden.

If ANY of the following apply, use form 1040:

  • Your taxable income is more than $100,000.
  • On Schedule A, you itemize your deductions.
  • You had income not shown on Form 1040 EZ or Form 1040 A, such as tax-exempt interest from private activity bonds issued after August 7, 1986.
  • You may claim any miscellaneous adjustments to income other than those listed above on Form 1040A.
  • The amount of uncollected employee taxes (social security and Medicare tax) on tips or group term life insurance is displayed in box 12 of form W 2.
  • You received at least $20 in gratuities in a single month and did not disclose them to your employer.
  • You were a genuine resident of Puerto Rico, and your income is not subject to Puerto Rican taxation.
  • Any credits not listed under Form 1040-A should be claimed here.
  • If you have received payment in stock from an expatriate corporation, you are required to pay excise tax.
  • You will see an amount in Box 12 of Form W 2 with code Z (See Bonus page for more details).
  • You had a distribution from your IRA to fund your HSA.
  • You are a wage earner, and your employer did not withhold Social Security and Medicare taxes.
  • You may need to file additional forms with your return, depending on your tax situation. These forms report certain exclusions, taxes, or transactions and include Form 8050 and Form 8960 (for more advanced returns).
  • You are considered a debtor if you file for bankruptcy after October 16, 2005.
  • The first-time homebuyer credit must be repaid.
  • If your adjusted gross income is more than $150,000, you must reduce the dollar amount of your exemptions.

Itemized Deductions vs. Standard Deduction

Let us look at when and why to take the standard or itemized deductions.

The standard deduction lowers the taxable income for individuals. The deduction amount may differ based on filing status, age, or blindness. For example, if you are married and filing jointly, you may have a different deduction than someone single.

Your deduction will be limited if someone else can claim you as a dependent on their taxes.

The standard deduction amount will be adjusted each year to keep up with inflation.

Other cases where you cannot take the standard deduction include if you are filing separately as married people or if you do not live in the same state as the property. But we will not be discussing those scenarios in this e-Book.

On the Schedule A form 1040, you will calculate your itemized deductions.

The amount is calculated based on all deductible categories, such as medical expenses, mortgage interest payments, taxes, charity contributions, employee business expenses, and other deductible costs allowed under these categories.

If you cannot claim the standard deduction or the total of your itemized deductions exceeds the standard deduction and might provide you with a better benefit, you should itemize your deductions.

Tax Cuts

You might want to consult with a tax preparer before tax season to understand better what records of expenses you should maintain throughout the year.

In my experience, friends and relatives offer advice with the best intentions and suggest things they believe are tax write-offs.

Keeping track of all expenditures may be time-consuming and unneeded if you do not know how to comply with the rules. This refers to comprehending adjustments, deductions, and credits in the tax field.

Let us investigate those items further.

Make Adjustments

Adjustments are outlays that help calculate your Adjusted Gross Income (AGI), which subsequently determines your taxable income.

You may be eligible for adjustments on student loans interest that you paid within the year, IRA contributions, alimony payments (certain rules apply), and more. These deductions can be found on page 1 of form 1040.

Tax Deductions

Let's dig a little deeper into itemized deductions.

The most typical deductions are medical bills you paid (for yourself, your spouse, and your dependents), mortgage interest and property tax payments, and unreimbursed employee business expenses.

Some of those deductions might have limits, such as the maximum amount you can deduct for medical expenses is 10% of your AGI (7.5% for individuals age 65 or older), and the maximum amount you can deduct for unreimbursed employee business expenses is 2% of your AGI.

Statements from nonprofit organizations may be required for large charity contributions. (At the time of this writing, Congress is still making some changes to the limitations).

Credits

Tax credits are often the most beneficial to taxpayers. A tax credit reduces your tax liability dollar for dollar, which is the case in this example.

This implies that if you consider all of the adjustments and deductions at $4000, a $1000 tax credit would lower your payment to $3000.

There are numerous tax credits that individuals may claim, such as the child tax credit (visit irs.gov), the child and dependent child tax credit, education credit, earned income credit, and more.

There are two types of credits:

Two types of credits
  • Non-refundable credits reduce your tax obligation but not to zero.
  • Refundable credits reduce your tax burden and, in some cases, result in a refund.

Use this link to access Form 1040.

Earned Income Credit (EIC)

The Earned Income Credit affects many people; let us explore why you may or not be eligible to receive it.

The EIC is one of the most popular credits for taxpayers with little disposable income.

You must meet all of the following qualifications to be eligible:

  • You must have a working Social Security number.
  • You have made income by working for someone, operating a business, farm, or other sources.
  • You cannot file your taxes as 'Married Filing Separate.

    Needs to be:
  • A U.S. citizen or resident alien for the entire year or have been lawfully admitted to the United States with an intention to reside permanently and continuously during your stay (green card holder).
  • A nonresident alien married to a U.S. citizen or resident alien, file your taxes jointly and choose to be treated as a resident alien (check with the IRS for more information).
  • Must not be another person's qualifying child
  • You cannot file Form 2555 or 2555-EZ if your earned income is from a foreign source.
  • The earnings shown on the updated income limitations, maximum credit amounts, and tax law must be met to qualify for the Adjusted Gross Income.
  • Your investment earnings must exceed or be less than the amounts stated in the income limitations, and tax legislation changes determine the maximum credit totals.

After you meet the EIC rules, you must also meet the rules for workers without a qualifying child or a qualifying child.

Who Is a Qualifying Child?

A child has to meet all 5 of the following requirements to be considered a qualifying child:

The criteria for this study include relationships, age, residency, support, and joint return (see Appendix).

Before going to the tax office, ensure you have compiled all of the requirements for your child's qualifications. Ask your tax professional about this before your scheduled meeting to save time.

Early Childhood Education

The Child and Dependent Care Credit only apply to work-related expenses.

  • Work is allowed for you (and your spouse if filing jointly), whether employed by someone, self-employed or owning a business partnership.
  • These benefits are used to help cover a qualifying person's care costs.

The credit is a percentage of your total expenses for the care of your child and is limited by how much money you make (AGI) and the earned income limitation. Expenses that are reimbursed to you by your employer cannot be included when calculating the credit.

What expenses can you claim for daycare?

  • Pre-school expenses have been paid for (before kindergarten)
  • Students before and after school care (K or higher grade) may be deducted.
  • Out-of-home care for children under 13 or disabled dependents
  • A day-care center that follows all state and local regulations
  • Even if a day camp specializes in an activity like soccer or computers, the cost of sending your child to one may be considered a work-related expense.
  • The fee to transport qualifying individuals to and from the daycare is deductible. By bus, private vehicles, taxi, or other means
  • To deduct Dependent Care costs, you must submit information from each care provider.

    The tax identification number or the Social Security number of the provider, the name, address, phone number, and billing statement are all needed. Without them, your credit will not be accepted in your taxes.

APPENDIX

Your First Job

You receive your pay at the end of each week, only to discover that a portion of it has been stolen. Employers take out - or deduct - the taxes you owe from your salary.

In some states and localities, employers are required by law to withhold money for federal income taxes, social security contributions, and state and local income taxes.

Taxes are fees paid to the government to provide public goods and services. National defense, street lights, roads, and highways are examples of public goods.

Welfare programs, garbage collection, law enforcement, and education are all public services.

When starting a new job, your employer will have you fill out a Form W-4 and Employee's Withholding Allowance Certificate to figure out how much money to withhold from your paychecks.

Your employer (even if you do not work for them anymore) will give you an IRS Form W-2, Wage, and Tax Statement, showing how much money you made in wages, tips, and other payments over the previous year on January 31.

It will also show your Federal and state income taxes, Social Security benefits and taxes, Medicare wages and taxes, and any tip withholdings.

Below are IRS tips for what records you should keep after filing your income tax.

Taxes for Students Who Work During the Summer

Getting a summer job is popular among students. If it is your first job, you will learn about the working world, including the taxes we pay to support our community, state, and nation.

  • It is no surprise that your boss withholds taxes from your paychecks- that is how you are supposed to pay taxes when you work for someone else.

    If you do not have an employer, you might have to pay estimated taxes directly to the IRS on certain days of the year. This is our government's way of ensuring everyone pays their fair share.
  • Employees need to fill out a Form W-4, Employee's Withholding Allowance Certificate, for their employer to correctly withhold federal income tax from pay. The IRS provides a helpful tool on its website, IRS.gov, to assist with the form.
  • All tip income is taxable. If you get tips, record them every day so you can report them. You must submit $20 or more cash tips to your employer each month and all of your annual tips on your tax return.
  • Any money you make from working for someone else is taxable. Some jobs may be considered self-employment, like babysitting or mowing lawns.

    Keep track of expenses related to your work so you can deduct them from your income on your taxes–this could help lower the amount you owe.
  • Your active-duty pay, such as what you get for summer camp while in ROTC, is taxable. A subsistence allowance given to you while in advanced training is not taxed.
  • It is possible that you will not be able to pay income tax after all. However, your employer is usually required to deduct Social Security and Medicare contributions from your earnings.

    If you are self-employed, you may have to handle them yourself. They are considered part of your Social Security coverage.
  • If you work as a newspaper carrier or distributor, special rules apply to you. If you meet certain conditions, you are considered self-employed by the government.

    However, if you do not meet those conditions and are under age 18, Social Security and Medicare taxes usually do not apply to your earned income.
  • If you only earn a small amount of money from your summer job, you might not have to file a tax return.

    Even if that is the case, you may still want to file one anyway. For example, if your employer has withheld income tax from your paychecks, you must file a return to get that money back.

    You can prepare and e-file your tax return for free using IRS Free File; it is available exclusively on IRS.gov.

The following are the codes you may find on your W-2, Box 12:

Many individuals contribute a portion of their income to their 401(k) or pension plan. This amount is tax-deferred, which means it is not taxed right now but will be in the future when it is paid out.

Certain guidelines must be followed, which we are not going into depth in this e-Book.

A Child or Person Must Meet Certain Requirements To Be Seen as a Dependent

To be a qualifying child, you must complete one of the following tests:

The following tests must be met for a child to qualify as your dependent for tax purposes:

  • The youngster must be a citizen of the United States, an inhabitant alien, or a resident of the United States.
  • The child is not filing a joint return unless they need to file to get a refund of their tax withheld.
  • The child must be biologically related to you as a son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, or stepsister; OR they could be a descendent of any of them.
  • For the child to be qualified, they must have lived with you for more than six months out of the year.
  • At the end of the year, the child must be less than 19 or 24 for full-time students or any age if permanently disabled at any time during the year.
  • The youngster does not provide more than half their own support for the year.

To Be a Qualifying Relative, You Must Pass This Test

  • You can claim a qualifying child, but not if the youngster/dependent is not one of your or other taxpayers' qualifying children.
  • The child/dependent must live with the taxpayer for the entirety of the year, with a few exceptions for specific relatives.
  • The individual must have provided more than half their support for the year.
  • The individuals' income is less than $3900 (for 2013).

Conclusion

Federal Income Taxes are the taxes that the United States government levies on its citizens' and residents' income. Individual Federal Income Tax is what you, as an individual citizen or resident, pay to the IRS based on your annual earnings.

Your tax liability will be different every year, as it is based on many factors such as how much you earned, whether you had any deductions or credits, and what tax bracket you are in.

The amount of taxes you owe also changes based on life events such as getting married, having children, or changing jobs.

This article has hopefully given you a better understanding of individual federal income taxes. Remember, it is always best to speak with a tax professional or the IRS if you have any questions or concerns regarding your taxes.

The IRS also offers many resources on its website.

Individual Federal Income Taxes FAQs

About the Author

True Tamplin, BSc, CEPF®

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True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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