What are Federal Taxes & Why Do We Pay Them?

If you filed a tax return in the US this year, you probably owe or have paid federal taxes.

Federal taxes are a regular part of life for most people, but what are federal taxes, and why do you have to pay them? And what are federal taxes used for?

If you plan on working and paying taxes for the foreseeable future, understanding federal taxes is important. Learn more about federal taxes, why you have to pay them, and how to file a federal tax return.

What are federal taxes?

Federal taxes are taxes collected by the federal government on your earnings during the year. When you file your federal tax return at the end of the year (Form 1040), you’ll calculate how much you owe after taking into account other payments you have made in federal taxes for that tax year.

Federal income taxes are based on your tax bracket. Generally, the more money you make, the higher your income tax rate. In total, there are seven tax brackets. Federal income tax rates range from 10% to 37%. Use a tax bracket calculator to determine what tax rates you’re subject to.

While most people are required to file and pay federal taxes, there are specific tax filing requirements. If your gross income is below a certain threshold, you’re not required to file a federal tax return at the end of the year. However, you might still want to file taxes to see if you qualify for a refund.

Are there different types of federal taxes?

When experts discuss federal taxes, they’re usually talking about federal income taxes. However, there are several other types of federal taxes that you may have to pay. Some types of federal taxes include:

• Capital gains: If you sold an asset for a profit, you’re required to pay capital gains taxes on the profit you earned. Short-term and long-term capital gains are taxed at different rates, so holding assets for more than a year can affect your tax liability.
• Dividends: Both qualified and non-qualified dividends are taxed by the federal government. Qualified dividend tax rates are based on your income, while non-qualified dividends are taxed at rates up to 37 percent.
• Estates and gifts: If you gift someone money or property, you may be subject to gift taxes. There are also taxes on estates, which are based on the value of your taxable estate.

Are federal taxes different from state taxes?

Federal taxes are different from state taxes in several ways. Federal taxes are levied by the federal government, and filing your federal taxes may require different tax documents.

When you file your federal tax return, you also need to file a state tax return to calculate the state taxes you owe. These taxes vary from state to state. Some states have no income tax, including:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Additionally, New Hampshire doesn’t have earned income tax, but you will have to pay tax on interest and dividend income.

What are federal income taxes like compared to state income taxes? While federal income tax rates are typically higher as a whole, some states have a significantly higher state income tax rate than others.

Whether you’re a first-time taxpayer or you’re moving to a new state, it’s important to research state tax laws to make sure you’re paying any taxes you’re required to pay in addition to your federal taxes.

Who is required to file federal taxes?

Almost everyone is required to file a return by the tax filing deadline and pay federal taxes. However, you may not be required to file federal taxes, depending on your income.

You must file taxes for 2024 if:

• Your filing status was single, and your gross income was at least $14,600 if you’re under 65 or $16,550 if you’re 65 or older.
• Your filing status is head of household, and your gross income was at least $21,900 if you’re under 65 or $23,850 if you’re 65 or older.
• Your filing status is married, filing jointly, and your gross income was at least $29,200 if you’re both under 65, $30,750 if one of you is 65 or older, or $32,300 if you’re both 65 or older.
• Your filing status is married, filing separately, and your gross income was at least $5 (no matter your age).
• Your filing status is qualifying surviving spouse, and your gross income was at least $29,200 if you’re under 65 or $30,750 if you’re 65 or older.

You’re also required to file and pay federal income taxes if you earned more than $400 in net earnings as a self-employed individual. This includes side jobs and any other work you do as a self-employed individual.

Even if you don’t meet the general income requirements, you may need to file federal taxes. 

You may need to file a federal tax return if:

• You owe special taxes reported on Schedule 2 of Form 1040.
• You or your spouse received Archer MSA, Medicare Advantage MSA, or health savings account distributions.
• You had wages of at least $108.28 from a church or church-controlled organization that’s not required to pay Social Security or Medicare taxes.
• You received advance payments through the Health Insurance Marketplace.

If you’re not sure if you need to file a tax return, consult a tax expert. You can use a tax calculator to estimate how much you have to pay–or what you could be getting back– in federal income taxes.

What types of income are taxable?

Most types of income are considered taxable income by the federal government. Income doesn’t have to be money, either — it can also be property, goods, or services. Some examples of taxable income include:

• Wages and employee benefits on Form W-2
• Freelance or independent contractor work
• Goods or services sold online
• Business partnerships
• Capital gains
• Dividends
• Digital assets such as cryptocurrency
• Alimony payments
• Gambling winnings
• Prizes and awards

Even if you don’t have traditional sources of income, there’s a good chance you have to file–and potentially pay–federal taxes. Whether you’re buying and selling stocks, receiving payments from Social Security, or working a regular job, your income is taxable.

Some types of income are nontaxable, but that doesn’t mean you don’t have to file a tax return. Even if your income is tax-exempt, you may still need to include it on your federal tax return.

How do you know how much you’re required to pay for federal taxes?

You can figure out how much you owe in taxes using an income tax calculator, which can give you an estimate of how much you can expect to pay.

As you enter information to file your federal tax return, you’re also calculating the taxes you owe. You have to manually calculate your tax bill when filing paper taxes, but tax software like TurboTax can automatically calculate your taxes as you enter your information. 

Your tax bracket and the tax rates applicable to the income within those thresholds determine how much your income tax is. This income tax rate can be as high as 37 percent or as low as 10 percent.

That said, when it comes to determining how much you owe or get as a refund, there are many factors that apply, such as:

• Filing status
• Deductions and credits
• Dependents

If you’re not sure how much you owe and you don’t want to make any mistakes, you can have a TurboTax expert file for you.

Why do we pay federal taxes?

Paying a significant chunk of your annual income in federal taxes can be frustrating, but it’s for a good cause. Federal income taxes contribute to the US budget, and that money is used to improve the country and the lives of the people living in it–including yours.

Some examples of programs that are supported by federal taxes include national defense, veterans and foreign affairs, social and community programs, and law enforcement. The money you contribute helps the government fund all these important programs and initiatives.

While federal income taxes don’t contribute to Social Security and Medicare, there are separate federal taxes for these programs. That means your federal taxes are also used to provide affordable healthcare and Social Security retirement benefits.

How do you file federal taxes?

The federal tax filing deadline is April 15. If you can’t file your taxes by the April 15 deadline, you can request an extension to file and extend the due date to  October 15.  Remember, your tax balance due on your tax return is still due by April 15, so be sure to make that payment by the due date to avoid any additional penalties and interest

Understanding federal taxes and how they’re calculated can be confusing, but filing your taxes is simple. You can complete a paper tax return and mail it to the IRS, use tax software, or work with a tax expert to file your taxes.

If you’re filing a paper return, you’ll need to fill out Form 1040 using information from your W-2 and other tax documents. Work through each line using a calculator to prevent mistakes.

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.