Personal Income Tax: Overview

The government collects income tax from U.S. residents each year through the Internal Revenue Service (IRS). Personal income tax revenues help the federal government fund such things as road construction, national defense, and the welfare system. If employed, an individual's employer will withhold income taxes. Because self-employed individuals do not have taxes withheld, they will generally pay estimated taxes throughout the year.

This is an overview of issues related to filing tax returns and paying federal income taxes. See FindLaw's Income Tax Basics and Filing Taxes sections for additional articles and resources.

Filing a Personal Income Tax Return FAQ

Here are the answers to common questions related to filing a personal income tax return:

Q: What Income Is Subject to Income Tax?

Individuals must pay taxes on their adjusted gross income, which usually includes wages, salaries, tips, commissions, business income, rents, dividends, alimony, capital gains, distributions from traditional IRAs, unemployment benefits, and Social Security benefits.

Q: How Is My Income Tax Calculated?

The federal income tax system is not based on a flat tax where everyone pays a single rate. Your personal income tax rate is determined by the amount of income you earned during the tax year. The IRS has individual income tax brackets ranging from 10% to 37%. The percentage you pay increases with each income threshold you reach.

Q: What Is My Filing Status?

The IRS takes your personal family situation into account when it calculates how much tax you owe. Your filing status can be single, married filing jointly, married filing separately, head of household, and qualifying widower. If you are married, you are allowed to file a joint return together that essentially doubles the tax benefits you receive, but you are not required to file jointly. For example, for married couples, the 2023 standard deduction is $27,700, which is double the $13,850 standard deduction for individual filers. If you are not married but have a child or a dependent, you may file as head of household and receive greater benefits than an individual but fewer than a married couple. The 2023 standard deduction was $20,800 for those filing as head of household.

Q: What Kinds of Deductions Can I Take?

Tax deductions are adjustments to an individual's taxable income that usually further a government tax policy, like promoting home ownership or college education. For every dollar of deductions an individual has, the amount of income the government levies taxes on decreases by a dollar. A taxpayer can take the standard deduction or claim itemized deductions. Common deductions include student loan interest, college tuition, medical and dental costs, mortgage points, mortgage interest, property taxes, state income taxes, charitable contributions, and home office expenses.

Q: What About the Personal Exemption?

Until 2017, the federal tax code provided for a personal exemption. However, the 2017 Tax Cuts and Jobs Act did away with the personal exemption and replaced it with the much larger standard deduction. Some states, like New Hampshire, still provide a personal exemption from the income tax.

Q: What Are Tax Credits?

Tax credits reduce an individual's tax liability dollar for dollar. For every dollar of tax credits that an individual has, the dollar amount of the taxes that they must pay goes down by a dollar. Every year new tax credits become available, but common credits include the earned income tax credit, first-time homebuyer credit, child and dependent care credit, adoption credit, Hope and Lifetime Learning credit, credit for the elderly and disabled, and retirement savings contributions credit.

Q: Does My Business Pay Income Tax?

The short answer is yes. However, the specifics of how your business is taxed depend on how it is organized. Most small businesses are organized as partnerships, S corporations, or sole proprietorships where the business's net income is simply treated as personal income to you and your partners (if it is a partnership). However, businesses organized as C corporations are subject to the corporate income tax on the income it earns.

Q: Can I Obtain an Extension if I Can't File My Tax Return by April 15?

If a taxpayer is unable to file a return on time, the taxpayer can request an automatic extension by filing IRS Form 4868. Along with filing the tax form, it is necessary to pay all the tax liability or the estimated income tax due. The extension to file does not extend the time to pay.

Q: What Happens if I Don't File a Tax Return?

Federal tax law requires you to file an income tax return each year. If you fail to do so, the IRS can seek criminal charges against you if they discover the nonpayment within six years. That six-year period only applies to criminal charges because there is no statute of limitations for collecting any taxes you owe from a year when you did not file a return. In addition, failing to file a tax return by the deadline can result in:

• The assessment of penalties and interest on the tax debt
• The filing of a substitute return for the taxpayer by the IRS
• The IRS beginning collection activities after assessing the tax debt, including levying wages and bank accounts and placing a lien on real property

Q: Do I Have to File a Tax Return if I Live in Another Country?

A U.S. citizen earning income abroad still must file a tax return and pay taxes to the U.S. government, even if they are a nonresident. If qualified for the foreign earned income exclusion, the taxpayer may exclude foreign income up to $107,600 (for 2020). The taxpayer may also qualify for the foreign housing exclusion and deduction. In some countries, the taxpayer may also have to pay income taxes in the country they reside in.

Q: What Types of Activities May Trigger an Audit by the IRS?

It is difficult to completely audit-proof a tax return, but some taxpayer activities may stand out. For instance, the IRS may scrutinize the tax information of a self-employed person more than an employed taxpayer because there is more opportunity to hide income and claim personal expenses as business expenses.

Q: What About State Income Taxes?

Most states have some form of income tax but generally impose the tax at a lower rate than the federal government. The seven states that don't have an income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Many states also have a sales tax, and some have a statewide property tax.

Paying Personal Income Tax FAQ

Here are the answers to common questions related to paying personal income tax:

Q: Can I Pay My Tax Debt in an Installment Plan?

A taxpayer that is unable to pay their tax debt by the deadline may work out an installment agreement with the IRS. An installment agreement allows payment of the debt in installments, but interest and penalties will apply. To qualify, the taxpayer must be current on their tax return filings.

Q: Can I Settle My Tax Debt With the IRS?

In some cases, the IRS will agree to settle a tax debt for less than what the taxpayer owes. Requests to settle debts are called "offers in compromise" (OICs). If the debtor can pay the full tax liability in an installment plan or by another method, the IRS will most likely deny a settlement request. The IRS may accept a request based on three reasons:

• Doubt about the tax liability
• Doubt that the tax debt is collectible
• If collecting the tax liability would create an economic hardship or an exceptional circumstance that makes it unfair

Can I Settle My Tax Debt With the IRS?

In most circumstances, tax liability survives bankruptcy. In Chapter 13, the debtor will have to pay the debt in full in a repayment plan. The debtor will most likely continue to owe the debt at the conclusion of a Chapter 7 bankruptcy. However, a taxpayer may discharge tax liability in Chapter 7 upon the fulfillment of certain conditions.

Still Have Questions? Reach Out to an Attorney

If you have questions about personal income tax and how it will affect you, you may want to contact a local tax attorney for help. Tax attorneys have a deep understanding of tax law and have made a career out of helping people with their tax problems.