The Internal Revenue Service, or IRS, is the federal agency tasked with collecting income taxes. Anyone who earns a certain amount of income owes money to the IRS annually. The amount varies by how much you earn in a year and how many deductions and credits you can claim.
U.S. income taxes are progressive, meaning the more you earn, the more you pay. Tax brackets as of 2010 are 10, 15, 25, 28, 33 and 35 percent of income. The 10 percent bracket is a straight percentage of your income, while each of the higher brackets has a minimum amount of tax plus a percentage.
The IRS requires you to file a tax return annually, usually in the spring, to calculate the amount of income tax you owe. However, if you work for someone else, you will often file a form, called a W-4, that allows your employer to collect income taxes from each paycheck. If you are self-employed, you are responsible for paying your own income taxes, and the IRS may require you to estimate the income taxes you owe and pay them quarterly.
Deductions and Credits
The IRS allows you to offset some of the income tax you owe through deductions and credits. Deductions reduce the income that is subject to income tax, while credits directly reduce your tax burden. Everyone who earns income can claim a standard deduction, which varies based on your filing status. You are also allowed to eschew the standard deduction and "itemize," in which you can deduct a multitude of everyday expenses, such as charitable donations, mortgage interest, real estate taxes and medical expenses. Most credits are targeted toward certain groups of people, such as the poor, students and families with children.
You don't owe the IRS only for income you have earned from a job or business. The IRS requires you to pay income tax on gambling winnings and money you win from contests or game shows. You must also pay income tax on gifts and inheritances above a certain amount. The IRS also taxes dividends and appreciation from stocks and bonds, although at a lower rate.
In addition to owing income tax to the IRS, you may also owe income tax to your state or city. According to the IRS, 41 states have an income tax as of 2010. The states have different tax rates, and each requires you to file an additional tax return. Local income taxes are much less common. According to the Tax Foundation, local income taxes were common in cities in Indiana, Kentucky, Maryland, Michigan, Ohio and Pennsylvania as of 2008. Large cities in other states with local income taxes in 2008 included New York City, San Francisco, Denver, Kansas City, Missouri and St. Louis.
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