Tax Basics: A Beginner's Guide to Taxes

The U.S. tax code was written by Congress and it governs the collection of taxes, enforcement of federal tax rules, and who receives tax refunds, rebates, and credits. The Internal Revenue Service (IRS) is the government agency within the U.S. Department of Treasury that carries out these functions.

The following sections offer a beginner's guide that provides you with an overview of the federal tax system to give first-time filers an understanding of tax basics.

What federal taxes are there?

While most Americans who have jobs are familiar with the federal income tax, that is just one of a number of taxes imposed by the federal government. Other federal taxes include:

• Capital gains tax
• Social Security tax 
• Medicare tax 
• Self-employment tax
• Gift tax
• Estate tax
• Excise taxes on cigarettes, fuel, and other items

The IRS oversees the assessment and collection of all of these federal taxes. Most states also impose their own income and sales taxes. Some states impose a property tax instead of an income tax.

What does the IRS do?

The IRS interprets the federal tax code by issuing regulations that provide guidance on applying tax law. To address situations not addressed by regulations, the IRS also releases revenue rulings, revenue procedures, and private letter rulings that provide taxpayer guidance. Although the IRS can interpret the tax code, taxpayers can ask the courts to step in and address how Congress intended the tax code to be applied.

How does the government use taxes?

The U.S. government disburses tax money according to the federal budget. The budget directs government spending for things like national defense, Social Security, education, national parks, and government services like welfare.

What is taxable income?

The tax code defines gross income as "income from whatever source derived." Two types of income are subject to taxation: earned income and unearned income. Earned income includes:

• Salary
• Wages
• Tips
• Commissions
• Bonuses
• Unemployment benefits
• Sick pay
• Some noncash fringe benefits

Taxable unearned income may include:

• Interest
• Dividends
• Profit from the sale of assets
• Business and farm income
• Rental income
• Royalties
• Gambling winnings
• Gifts and inheritance

It is possible to reduce taxable income by contributing to a retirement account like a 401(k) or an IRA.

How are income taxes calculated?

The amount of federal income tax you pay is based on a number of factors, but in most cases, the primary determinant is your tax bracket. Your tax bracket is used to determine your tax rate and is determined using your taxable income, which is your total income minus specific deductions, and your filing status. Your tax rate is the percentage of tax you pay on your income.

What are tax deductions?

While all of your income is subject to tax, Congress lets taxpayers lower their tax bill through tax breaks that allow them to exclude a portion of their income from taxation. These exclusions are known as tax deductions. The deductions are subtracted from your adjusted gross income to determine the income subject to tax. Your adjusted gross income is your total income minus adjustments for things like student loan interest and IRA contributions.

Each U.S. taxpayer can claim the standard deduction or add up the specific deductions they want to claim, known as itemized deductions. You can't do both. It is estimated that 90% of taxpayers claim the standard deduction available to all taxpayers because it either results in a larger deduction than itemizing or spares them the effort of needing to prove all of their expenses. The amount of the deduction is based on your filing status. For 2023, the standard deduction for an individual was $13,850 and $27,700 for married couples filing jointly.

If you choose to itemize, you are allowed to deduct your payments for a variety of items. Common deductions include mortgage interest, state taxes, local taxes, charitable donations, and certain medical expenses. If you own your own business, you can deduct business expenses.

Filing Your Taxes

Most Americans must prepare and file an income tax return every April 15 for the previous tax year. In other words, you will file tax returns for 2023 in April 2024. Unfortunately, the Tax Code and tax forms are complicated. Many Americans with high incomes or complex tax situations seek professional tax preparation services rather than prepare their own taxes. Many of those who don't turn to professionals for their tax prep use tax software to e-file their returns.

A number of tax software providers will let you file for free if your adjusted gross income (AGI) is below a specified number ($73,000 for many providers). For a complete list of tax software providers who provide free filing, check out the IRS website.

Paying Your Taxes

You are expected to pay your taxes by the time your tax returns are due on April 15. While this was traditionally done using a check mailed with your return, the IRS now lets you pay from your bank account via direct deposit or using a credit card through a third-party provider.

If you can't afford to pay your entire tax bill when it is due, you can contact the IRS about working out a payment plan. In very limited situations, the IRS will allow you to pay a reduced amount or eliminate your bill entirely if it examines your finances and finds you are unable to pay now and won't be able to pay in the future.

Additional Questions? Talk to a Tax Lawyer

If you have specific questions about filing your federal income taxes that you can't answer on your own or are concerned that your tax returns will invite IRS scrutiny, you may want to consult with a local tax attorney. A tax attorney is a tax professional who understands the Tax Code and will know how to help you with your tax situation.