Federal Income Tax (FIT)

What Is the Federal Income Tax?

The federal income tax is levied by the federal government on the annual earnings of individuals, businesses, trusts, and other legal entities. Not all earnings are subject to the federal income tax; only those that fall under the category of taxable income (both earned and unearned) are subject to the FIT.

While taxable income amounts will vary due to filing status, all of the following earnings are subject to federal income tax:

• Wages and salaries (including those from self-employment)
• Bonuses and cash gifts from employers
• Tips and commissions
• Unemployment benefits
• Canceled debts
• Business income
• Gambling income
• Capital gains

The federal income tax (FIT) is the largest source of revenue for the federal government.

Who Has to Pay Federal Income Taxes?

U.S. citizens and permanent residents working in the United States earning more than a certain amount must pay FIT. Additionally, all businesses (except partnerships) pay federal income taxes, as do trusts and other legal entities.

Who Is Exempt From Federal Income Tax?

The following individuals and entities are usually exempt from federal income tax withholding:

• Students
• The visually impaired
• Non-profit organizations
• U.S. citizens working abroad
• Those older than 65 whose sole income is Social Security
• Those with dependent children who qualify for the Earned Income Tax Credit

When people file as “exempt,” they don’t make any FIT payments during the year. To qualify as exempt, a person must not have owed FIT in the prior tax year and not expect to owe FIT in the current year.

What Are the Federal Income Tax Brackets?

The income tax rate is dependent on taxable income earned. For 2023, there are seven income tax brackets:

How Does the US Government Spend Federal Income Taxes?

The US government uses federal income taxes to provide programs and services to taxpayers, such as:

• National defense
• Law enforcement
• Pensions and benefits for government workers
• Food and housing assistance programs
• Improvements in education, health, agriculture, and public transit
• Emergency disaster relief
• Interest on the national debt

State vs. Federal Income Taxes

State taxes pay for local services and programs, while FIT pays for national initiatives. State income tax rates also vary by state but are usually lower than FIT.

As of 2023, nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.