An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
How Does the Individual Income Tax Work?
In the United States, individual income taxes are levied at the federal level as well as in most states. Many countries around the world also levy individual income taxes.
The U.S. income tax is progressive, which means that tax rates (the percentage of your income that you pay in taxes) increase as taxpayer income increases. The U.S. levies income tax rates ranging from 10 percent to 37 percent that kick in at the specific income thresholds outlined below. The income ranges for which these rates apply are called tax brackets. All income that falls within each bracket is taxed at the corresponding rate.
| Tax Rate | For Single Filers | For Married Individuals Filing Joint Returns | For Heads of Households |
|---|---|---|---|
| 10% | $0 to $11,000 | $0 to $22,000 | $0 to $15,700 |
| 12% | $11,000 to $44,725 | $22,000 to $89,450 | $15,700 to $59,850 |
| 22% | $44,725 to $95,375 | $89,450 to $190,750 | $59,850 to $95,350 |
| 24% | $95,375 to $182,100 | $190,750 to $364,200 | $95,350 to $182,100 |
| 32% | $182,100 to $231,250 | $364,200 to $462,500 | $182,100 to $231,250 |
| 35% | $231,250 to $578,125 | $462,500 to $693,750 | $231,250 to $578,100 |
| 37% | $578,125 or more | $693,750 or more | $578,100 or more |
| Source: Internal Revenue Service | |||
A graduated-rate structure like the one above, where every dollar of income above each threshold is taxed at a higher rate, results in marginal tax rates, the amount of additional tax paid for every additional dollar earned as income.
Due to various deductions, such as the standard deduction and itemized deductions, and credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), most taxpayers do not pay federal income taxes on all of their income. Many state tax codes also offer similar credits and deductions.
Who Pays the Federal Income Tax?
The progressive design of the U.S. income tax code leads to higher-income individuals paying a larger share of income taxes than lower-income individuals.
According to 2018 federal income tax data from the Internal Revenue Service (IRS), the most recent available:
- The top 1 percent of all taxpayers paid 40.1 percent of all federal income taxes, while the bottom 50 percent of taxpayers paid roughly 3 percent.
- The top 1 percent of taxpayers accounted for more income taxes paid (40.1 percent) than the bottom 90 percent combined (6 percent).
- The top 1 percent of taxpayers paid the highest average tax rate (25.4 percent), which is more than seven times the rate faced by the bottom 50 percent (3.4 percent).
Between 1950 and 2016, an increasing number of U.S. taxpayers owed zero income taxes after credits and deductions. Despite occasional dips, the trend has been an increase in the percentage of nonpayers, from 28 percent in 1950 to 33.4 percent in 2016. During this period, the minimum percentage of nonpayers was 16 percent in 1969, and the maximum was 41.7 percent in 2009.
Individual Income Taxes Are a Primary Source of Government Revenue
Compared to the OECD average, the United States relies significantly more on individual income taxes than other developed countries. While OECD countries on average raised 23.9 percent of total tax revenue from individual income taxes in 2018, in the U.S., individual income taxes (federal, state, and local) were the primary source of tax revenue at 40.72 percent, a difference of almost 17 percentage points.
State and localities rely heavily on the individual income tax, which comprised 23.5 percent of total U.S. state and local tax collections in fiscal year 2016, the latest year of data available. The level of reliance on income taxes varies significantly by state.
Which States Levy Individual Income Taxes?
As of 2021, 42 U.S. states also levy individual income taxes. Forty-one tax wage and salary income, while one state—New Hampshire—exclusively tax dividend and interest income. Eight states levy no individual income tax at all.
Of those states taxing wages, nine have single-rate tax structures, often called a “flat tax,” with one rate applying to all taxable income. Conversely, 32 states and the District of Columbia levy graduated-rate, progressive income taxes, with the number of brackets varying widely by state. Hawaii has 12 brackets, the most in the country.
States’ approaches to income taxes vary in other details as well. Some states double their single-bracket widths for married filers to avoid a “marriage penalty.” Some states index tax brackets, exemptions, and deductions for inflation; many others do not. Some states tie their standard deductions and personal exemptions to the federal tax code, while others set their own or offer none at all.
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