Lesson 1: What is Federal Income Tax?

Welcome to the first lesson in our series on Exploring Federal Income Tax Law. This lesson will provide a foundational understanding of what federal income tax is, why it exists, and how it affects you.

Introduction to Federal Income Tax

Federal income tax is a tax levied by the United States government on the annual earnings of individuals, corporations, trusts, and other legal entities. The tax is imposed on both earned income such as wages and unearned income such as dividends and interest. For a deeper dive into tax fundamentals, consider reading 'Federal Income Taxation: Principles and Policies'.

Note: Different types of income are taxed differently. To learn more, check out our lesson on What Constitutes Income?.

Purpose of Federal Income Tax

The primary purpose of federal income tax is to fund government operations and public services, including national defense, infrastructure, social programs, and public safety.

Basic Formula for Calculating Federal Income Tax

The basic formula for calculating federal income tax involves determining gross income, subtracting adjustments, deductions, and finally applying the appropriate tax rates.

$Gross Income - Adjustments = Adjusted Gross Income (AGI)$ $AGI - Deductions = Taxable Income$ $Taxable Income × Tax Rate = Tax Liability$

Understanding Tax Rates

Federal income tax rates are progressive, meaning the rate increases as the taxable amount increases. This is represented by tax brackets.

graph TD; A["Gross Income"] --> B["Adjusted Gross Income"]; B --> C["Taxable Income"]; C --> D["Tax Liability"];

Important!

Make sure to understand the difference between marginal and effective tax rates. Refer to our lesson on Marginal vs. Effective Tax Rate for detailed insights.

Filing Requirements

Not everyone is required to file a federal income tax return. The filing requirements depend on factors such as income level, filing status, and age. See our lesson on Who Needs to File a Tax Return? for more details.

Conclusion

Understanding the basics of federal income tax is crucial for effective tax planning and compliance. Stay tuned for our next lesson on the History of Federal Income Tax. For a comprehensive guide, you might also want to check out 'South-Western Federal Taxation 2021: Comprehensive'.