Fundamentals of Income Taxes

Federal Income Taxes – A simple concept with very complicated details

Our federal income tax system was created in 1913 mainly to generate revenue for the government. Since then, the laws have been expanded and revised numerous times, likely hundreds. If history repeats itself, you can expect tax laws to keep changing and probably become even more complicated.

While you probably don’t want to spend the time and effort to become an income tax expert, understanding some basic concepts can help you make better financial decisions and reduce some of the stress surrounding this aspect of life. Everyone’s tax situation can vary, and this article only covers some of the fundamentals. If your situation is complex or you feel you need professional help with your taxes, don’t hesitate to consult a specialist.

The very, very basics

1. You add up your income. Most types of income (wages, interest, dividends, and capital gains) are included.
2. Perhaps, you then make certain adjustments. These adjustments are usually for certain IRA contributions and business expenses.
3. You then subtract either a standard deduction (set by the government) or the total of your itemized deductions (state and local taxes, charitable contributions, mortgage interest, with some limits).
4. This leaves you with your taxable income.
5. You then apply a series of tax rates to certain levels of taxable income. Higher income gets taxed at higher rates.
6. You then compare your calculated tax with the taxes that have been withheld from your paychecks (and additional estimated tax payments you may have made).
7. The difference is what you owe when you file your return on April 15th or what you will receive as a refund.

A few more details

Income subject to tax – Most of the income you receive by working or by investing is taxable. Along with the items mentioned above, distributions from retirement plans (unless rolled into an IRA), lottery winnings, rental income, alimony, and business income are taxable. However, interest from municipal bonds is usually not taxable. Dividends and long-term capital gains (from investments held for more than a year) are taxed at a lower rate than other income.

Adjustments – If you are not eligible to participate in a company-sponsored retirement plan or if your adjusted gross income is below a certain level, contributions to a regular IRA are deductible. The current limit on IRA contributions is $7,500 for those under age 50 and $8,500 for those ages 50 and above. You may also be eligible to make adjustments for certain educational and business expenses.

Deductions – You can reduce your taxable income for certain expenses, such as state and local income taxes, charitable contributions, mortgage interest, and medical expenses in some cases. There are limits on the deductions for state and local taxes and some mortgage interest. If you don’t have these expenses or if your expenses are low, the law offers a standard deduction. In 2026, the standard deduction is $16,100 for individuals and $32,200 for married couples filing jointly.

Tax rates – Our tax system has progressive marginal tax rates. That means that income at lower levels is taxed at lower rates, while income at higher levels is taxed at higher rates. There are also different rates for those who file individual returns and for married couples filing joint returns.

Income Tax Rate Schedules for 2026

Single Return Rate Schedule		Married Filing Jointly Rate Schedule
Taxable income levels	Tax rate	Taxable income levels	Tax rate
0 to $12,400	10%	$0 to $24,800	10%
$12,401 to $50,400	12%	$24,801 to $100,800	12%
$50,401 to $105,700	22%	$100,801 to $211,400	22%
$105,701 to $201,775	24%	$211,401 to $403,550	24%
$201,776 to $256,225	32%	$403,551 to $512,450	32%
$256,226 to $640,600	35%	$512,451 to $768,700	35%
Over $640,600	37%	Over $768,700	37%

2026 Taxation of Dividends and Long-Term Capital Gains

Long-term capital gains and qualifying dividends receive favorable tax treatment, based on taxable income levels.

Tax rate on long-term capital gains and qualifying dividends	Taxable income levels for those filing individual returns	Taxable income levels for those filing joint returns
0%	Up to $49,450	Up to $98,900
15%	$49,451 to $545,450	$98,901 to $613,700
20%	Over $545,500	Over $613,700

Filing your returns – You must file your income tax return by April 15th each year. There are some rules that let you get an extension of time, but most people file by the deadline. Getting an extension does not allow you to delay paying any taxes owed. For most individuals, the taxes withheld from their paychecks cover what they owe or are very close. If you have a substantial amount of investment or other income, you might want to consider making estimated payments throughout the year to avoid penalties or interest.

Being tax sensitive, not tax foolish

No one wants to pay any more tax than what they are legally required to pay. The expenses of owning a home can provide itemized deductions, and contributions to your company retirement plan or IRA can also reduce your taxes. But be sure not to let the idea of saving taxes cause you to make financial mistakes.