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Federal income tax – What it is and why we pay it

3 min read


3 min read


Although there are many different types of taxes – estate tax and excise tax, etc. – often people are referring to federal income tax when they use the broad term “taxes.” This is likely because income taxes are the federal government’s primary source of revenue income.

In this post, we’ll explore the different types of income that is taxed below – along with the income tax definition, where it’s allocated within the U.S. federal budget, and who pays.

Income tax definition

So, “what is income tax?” – Let’s tackle this concept first.  Income tax is a tax levied by the country, state, city/township, county, and even school district you live in on income you receive in a tax year. Income tax varies from country to country, and even state to state.

How do taxes work?

Federal income tax in the U.S. is a “progressive” tax, paid at a marginal tax rate, which means each range of income you receive in a year is in a different federal tax bracket and taxed at a different rate. Progressive tax is a system where you pay more as your taxable income increases. Currently, there are seven tax brackets that range from 10 to 37%.

At tax time, your tax bracket, credits, deductions, and filing status all go into figuring your taxes and if you owe or get a refund.

Who pays income tax?

In the U.S, most people pay income taxes on the money they earn at a job, but there are many more forms of income.  This includes income from capital gains, gambling winnings, rents, royalties, interest and dividends, business earnings, unemployment compensation, and even lottery winnings. Check out this list of taxable and tax-free sources of income for a deeper dive.

While we all are required to pay federal income tax, not everyone will have to file a tax return. Find out how much you have to make to file taxes. Even if you don’t have a filing requirement, you may want to file to get a refund or tax credit.

Plus, if you need help determining what you owe in federal income tax – or state income tax – H&R Block’s skilled tax pros are here to help. Just want to get an estimate on your federal taxes? Check out our free income tax calculator.

Why do we pay income taxes?

Next, let’s answer “why do we pay taxes?” Paying federal and state taxes is mandated by the U.S. government, but why is this civic duty so important?

These taxes fund a long list of services and programs at the federal, state and local levels – as we cover in the next section. Without income taxes, there would be serious consequences to the financial wellbeing of the country.  

What are income taxes used for?

When you pay the IRS or your state revenue department, it’s like you’re chipping in to pay your part of a larger bill for shared resources. So, what are taxes used for? The answer includes a number of things. Here is a breakdown of categories:

  • Defense and international security assistance
  • Social Security
  • Medicare, Medicaid, CHIP, and marketplace subsidiaries
  • Economic safety net programs
  • Interest on debt
  • Benefits for federal retirees and veterans
  • Transportation infrastructure
  • Education
  • Science and medical research

Help with federal income tax preparation

Although income taxes serve an important social and economic purpose, you want to make sure you’re only paying the portion you truly owe. Taking advantage of formal federal income tax preparation is essential for achieving this goal. With many tax filing options and products, we can help you get there.

Make an appointment.

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