Tax
How federal taxes actually work for the money decisions most people make - paychecks, investing, retirement accounts, homes, and cars. Every rule links to the section of the tax code it comes from.
Last reviewed September 2026
2026 by the Numbers
Federal figures for tax year 2026 - the return you file in early 2027. Most dollar amounts are adjusted for inflation every year.
$32,200 for married filing jointly and $24,150 for head of household. This much income is never taxed, and most people take it instead of itemizing.
10, 12, 22, 24, 32, 35, and 37%. The 2025 One Big Beautiful Bill Act made these rates permanent instead of letting them expire after 2025.
Long-term gains that fall within the first $49,450 of taxable income (single) or $98,900 (married filing jointly) are taxed at 0%. Above that it's 15%, and 20% at the top.
6.2% Social Security (on wages up to $184,500) plus 1.45% Medicare, taken out of every paycheck on top of income tax. Your employer pays a matching 7.65%.
What you can put in from your paycheck. Age 50+ can add $8,000 more, and ages 60-63 can add $11,250 instead.
Shared across all your traditional and Roth IRAs combined. Age 50+ can add $1,100 more.
$8,750 for family coverage, plus $1,000 more at age 55+. Requires a high-deductible health plan.
IRC §223(b); IRS Rev. Proc. 2025-19
$500,000 for married couples filing jointly, if you owned and lived in it for 2 of the last 5 years. This amount is not adjusted for inflation.
The Basics
Six ideas that clear up most tax confusion.
Brackets are marginal
Each rate only applies to the slice of income inside that bracket. Moving into the 22% bracket means only the dollars above the line are taxed at 22% - the rest stays at 10% and 12%. So a raise never lowers your pay after federal income tax. (Some benefits and credits phase out as income rises, which is a separate effect.)
You're taxed on taxable income, not your salary
Start with all your income, subtract "above the line" items like traditional 401(k) and HSA contributions to get your adjusted gross income (AGI), then subtract the standard or itemized deduction. What's left is taxable income - the number the brackets apply to.
Credits beat deductions
A deduction lowers the income you're taxed on, so it's worth your bracket rate: a $1,000 deduction saves $220 in the 22% bracket. A credit comes straight off your tax bill: a $1,000 credit saves $1,000. A "refundable" credit can even be paid to you beyond what you owe.
Hold investments over a year
Sell something you've held one year or less and the profit is taxed like your paycheck. Hold it more than a year and it's a long-term gain taxed at 0%, 15%, or 20% - often a much lower rate.
Use tax-advantaged accounts first
401(k)s, IRAs, and HSAs let money grow without yearly tax on dividends and gains. Traditional accounts give you the tax break now; Roth accounts give it later. Filling these before a regular brokerage account is usually one of the best moves available.
Side income owes payroll tax too
Freelance and gig income is hit with 15.3% self-employment tax (both halves of Social Security and Medicare) on top of income tax, once net earnings reach $400. You get to deduct half of it, and should set money aside or pay quarterly estimates.
Bracket Estimator
See how your income fills each 2026 bracket, and the difference between your top rate and the rate you actually pay.
Simplified: treats all income as wages, uses the 2026 standard deduction, and ignores credits, capital gains, the new 2025-2028 deductions, and state tax. Payroll tax is estimated on the full wage amount (401(k) contributions don't reduce it). Results update as you type.
| Rate | Taxable income range | Your income here | Tax |
|---|
Plus about - in Social Security and Medicare tax (IRC §3101).
How Investments Are Taxed
In a regular brokerage account, different kinds of investment income get very different treatment. (Inside a 401(k), IRA, or HSA, none of this applies year to year - see the next section.)
| Type of income | How it's taxed | Tax code |
|---|---|---|
| When you sell | ||
| Short-term gain (held 1 year or less) | Same rates as your wages, 10-37% | IRC §1222(1) |
| Long-term gain (held more than 1 year) | 0%, 15%, or 20% depending on taxable income | IRC §1222(3), IRC §1(h) |
| Capital losses | Cancel out gains first. Up to $3,000 a year of extra loss can offset other income ($1,500 if married filing separately), and the rest carries forward to future years with no expiration. | IRC §1211(b), IRC §1212(b) |
| While you hold | ||
| Qualified dividends | Same low rates as long-term gains. Most dividends from U.S. stocks and broad stock funds qualify if you've held the shares long enough (more than 60 days around the dividend date). | IRC §1(h)(11) |
| Interest and non-qualified dividends | Ordinary income rates, 10-37%. Includes savings accounts, CDs, most bond funds, and REIT dividends. | IRC §61(a) |
| U.S. Treasury interest | Federal tax yes, but exempt from state and local income tax | 31 U.S.C. §3124 |
| Municipal bond interest | Federally tax-free and often state-tax-free for bonds from your own state | IRC §103 |
The wash sale rule
Sell at a loss and buy the same (or "substantially identical") investment within 30 days before or after, and you can't deduct the loss yet - it's added to the cost of the new shares instead. Swapping to a similar but different fund is the usual workaround when tax-loss harvesting.
An extra 3.8% at high incomes
The net investment income tax adds 3.8% on investment income once modified AGI passes $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not adjusted for inflation, so more people cross them each year.
Inherited investments reset
When you inherit stock or a house, its cost basis generally "steps up" to its value on the date of death. The gain that built up during the original owner's life is never taxed as income.
Tax-Advantaged Accounts
Where you hold an investment can matter as much as what you buy. Each account trades a tax break for rules about when you can take money out.
| Account | Putting money in | While it grows | Taking it out | Tax code |
|---|---|---|---|---|
| Retirement | ||||
| Traditional 401(k) / 403(b) | Pre-tax - lowers this year's taxable income | No yearly tax | Taxed as ordinary income | IRC §401(k), IRC §402(g) |
| Roth 401(k) | After-tax; no income limit | No yearly tax | Tax-free after age 59½ and 5 years | IRC §402A |
| Traditional IRA | Deductible, but the deduction phases out at higher incomes if you (or your spouse) have a workplace plan | No yearly tax | Taxed as ordinary income | IRC §219(g), IRC §408 |
| Roth IRA | After-tax; you can't contribute directly above certain income limits | No yearly tax | Tax-free after 59½ and 5 years; your contributions (not earnings) can come out anytime | IRC §408A(c)(3), IRC §408A(d) |
| Health and education | ||||
| HSA | Pre-tax (payroll contributions also skip the 7.65% payroll tax) | No yearly tax | Tax-free for medical costs. Anything else: income tax plus 20% before 65, just income tax after | IRC §223, IRC §106(d) |
| 529 plan | After-tax federally (many states give a deduction) | No yearly tax | Tax-free for qualified education. Otherwise earnings are taxed plus 10% | IRC §529(c) |
| No special treatment | ||||
| Regular brokerage account | After-tax; no limit | Dividends and interest taxed every year | Gains taxed when you sell (see above); no age rules | IRC §1001, IRC §1(h) |
Early withdrawal penalty
Taking taxable money out of a 401(k) or IRA before age 59½ usually adds a 10% penalty on top of income tax. There are exceptions, such as disability, a first home (up to $10,000, IRAs only), and leaving your job in or after the year you turn 55 (401(k) only).
Required withdrawals at 73
Traditional 401(k)s and IRAs make you start taking required minimum distributions (RMDs) at 73, rising to 75 for people born in 1960 or later. Roth IRAs never require them for the original owner, and Roth 401(k)s no longer do either.
Traditional or Roth?
Roughly: if your tax rate is lower now than you expect in retirement (common early in a career), Roth wins; if it's higher now, traditional wins. If you're unsure, splitting between both hedges the bet. Either beats a regular taxable account for retirement money.
Deductions & Credits
You either take the standard deduction or itemize - whichever is bigger. With the standard deduction this large, most households don't itemize, so check before counting on a write-off.
Standard or itemize?
Add up your itemized deductions (mortgage interest, state and local taxes, charity, and big medical bills - the ones listed below). If the total beats your standard deduction - $16,100 single, $32,200 married filing jointly, $24,150 head of household for 2026 - itemize. If not, take the standard deduction. You choose again every year, and tax software runs this comparison for you. IRC §63(b), IRC §63(d), IRC §63(e)
Itemizing can come out ahead when
- You pay a lot of mortgage interest - usually the early years of a large mortgage, when most of each payment is interest.
- Your state and local taxes are high - state income tax plus property tax in a high-tax state. The SALT cap went up to $40,400 for 2026, so this counts for more than it did.
- You give a lot to charity - especially if you "bunch" two or three years of giving into one year, itemize that year, and take the standard deduction in the others.
- You had large medical bills - more than 7.5% of your AGI that insurance didn't cover.
- You're married filing separately and your spouse itemizes - then you have to itemize too; your standard deduction is $0. IRC §63(c)(6)
The standard deduction usually wins when
- You rent, or your home is paid off or has a small mortgage.
- You live in a state with low or no income tax.
- Your giving is modest. Starting in 2026, people who take the standard deduction can still deduct up to $1,000 ($2,000 married) of cash gifts to charity, so not itemizing costs you less than it used to. IRC §170(p)
- Your write-offs are mostly the new ones. The tips, overtime, car loan interest, and senior deductions can be taken either way, so they don't push you toward itemizing.
Example: a married couple in 2026
AGI of $150,000, $16,000 of mortgage interest, $12,000 of state and property taxes, and $5,000 given to charity in cash. Itemized: $16,000 + $12,000 + $4,250 of the gifts (the part above 0.5% of AGI) = $32,250. Standard: $32,200 + $2,000 for the cash gifts = $34,200. Even though their itemized total is a bit above the plain standard deduction, the standard deduction wins by $1,950.
Common itemized deductions
- Mortgage interest
- Interest on up to $750,000 of debt used to buy, build, or improve your home. IRC §163(h)(3)
- State and local taxes (SALT)
- Property tax plus state income or sales tax, capped at $40,400 for 2026. The cap shrinks for modified AGI above $505,000 (never below $10,000) and drops back to $10,000 after 2029. IRC §164(b)(7)
- Charitable gifts
- Starting in 2026, only the part above 0.5% of your AGI counts. New this year: people who don't itemize can deduct up to $1,000 ($2,000 married) of cash gifts to charity. IRC §170, IRC §170(p)
- Medical expenses
- Only the amount above 7.5% of your AGI - so it usually matters only in a year with very large bills. IRC §213(a)
New deductions for 2025-2028
- Tips
- Up to $25,000 of tips in jobs that customarily receive them. Phases out above $150,000 of modified AGI ($300,000 married). Income tax only - payroll tax still applies. IRC §224
- Overtime
- The extra "half" of time-and-a-half overtime required by federal law, up to $12,500 ($25,000 married). Same income phase-out as tips. IRC §225
- Car loan interest
- Up to $10,000 a year of interest on a loan for a new, U.S.-assembled personal vehicle - details under Homes & Cars below. IRC §163(h)(4)
- Seniors
- An extra $6,000 per person age 65 or older, phasing out above $75,000 of modified AGI ($150,000 married). IRC §151(f)
All four of the new deductions can be taken whether or not you itemize.
Credits worth knowing
Child Tax Credit
$2,200 per child under 17, up to $1,700 of it refundable. Phases out above $200,000 of modified AGI ($400,000 married).
Earned Income Credit
A refundable credit for low- and moderate-income workers - up to $8,231 with three or more children in 2026, and smaller amounts with fewer or none.
American Opportunity Credit
Up to $2,500 per student for each of the first four years of college, and 40% of it is refundable.
Saver's Credit
Lower-income savers get 10-50% of up to $2,000 of retirement contributions back as a credit ($4,000 of contributions if married).
Homes & Cars
The tax rules behind the two biggest purchases most people make.
Selling your home
Up to $250,000 of profit ($500,000 married filing jointly) is tax-free if you owned it and lived in it as your main home for at least 2 of the 5 years before the sale. You can use this once every 2 years.
Owning a home
Mortgage interest and property tax are only deductible if you itemize. Many owners with moderate mortgages still take the standard deduction, so the "tax break" of owning is often smaller than people expect.
Rental property
Rent is taxable income, but you deduct expenses plus depreciation on the building over 27.5 years. Rental losses are limited, though active landlords can often deduct up to $25,000 a year, phasing out between $100,000 and $150,000 of modified AGI. A 1031 exchange defers the gain when you sell one property and buy another.
Car loan interest deduction
For 2025-2028, up to $10,000 a year of interest is deductible on a loan taken out after 2024 for a new car, SUV, pickup, or motorcycle that had its final assembly in the U.S. and is for personal use. Phases out above $100,000 of modified AGI ($200,000 married). Leases don't qualify.
EV credits have ended
The federal credits for new EVs (up to $7,500) and used EVs (up to $4,000) don't apply to vehicles acquired after September 30, 2025. Some states and utilities still offer their own rebates.
Sales tax on a car
If you itemize, you can deduct state sales tax instead of state income tax - handy in the year you buy a car, or if you live in a state with no income tax. It still counts toward the SALT cap.
Filing and Paying
The deadlines and penalties that catch people off guard.
April 15
Returns for a calendar year are due April 15 of the next year. An extension gives you until October 15 to file, not to pay - interest runs on anything unpaid after April 15.
File even if you can't pay
The late-filing penalty is 5% of the unpaid tax per month (up to 25%), versus 0.5% per month for paying late. Filing on time and setting up a payment plan costs far less.
Withholding and your W-4
Your employer withholds tax based on your Form W-4. A big refund means you over-withheld (an interest-free loan to the government); a big bill means you under-withheld. Update it after a new job, marriage, or a child.
Quarterly estimates
If you'll owe $1,000 or more beyond withholding (common with side income), pay estimates in April, June, September, and January. You avoid the penalty by paying at least 90% of this year's tax or 100% of last year's (110% if AGI was over $150,000).
Key Terms
Grouped by where you'll run into them.
Income
- Gross income
- All income from any source unless the law specifically excludes it - wages, tips, interest, gains, rent, side gigs. IRC §61
- AGI (adjusted gross income)
- Gross income minus specific adjustments like traditional IRA and HSA contributions. Many credits and limits are based on it. IRC §62
- MAGI (modified AGI)
- AGI with certain items added back. There's no single definition - each rule (Roth IRA limits, the 3.8% tax, and so on) spells out its own. e.g. IRC §408A(c)(3), IRC §1411(d)
- Taxable income
- AGI minus your standard or itemized deduction and certain other deductions. The brackets apply to this number. IRC §63
Rates
- Marginal rate
- The rate on your next dollar of income - your highest bracket. Use it to judge what a deduction or extra income is worth. IRC §1(j)
- Effective rate
- Total tax divided by total income - what you actually pay overall. Always lower than your marginal rate once you're past the first bracket.
- Ordinary income
- Income taxed at the regular 10-37% brackets: wages, interest, short-term gains, and most retirement withdrawals. IRC §64
Filing
- Filing status
- Single, married filing jointly, married filing separately, head of household, or qualifying surviving spouse. It sets your brackets and standard deduction. IRC §1, IRC §2
- Head of household
- For unmarried people who pay more than half the cost of a home for a qualifying dependent. Better brackets and a bigger standard deduction than single. IRC §2(b)
- Refundable credit
- A credit that can be paid to you even after your tax reaches zero. A non-refundable credit can only lower your tax to zero. e.g. IRC §24(d), IRC §32
- Statute of limitations
- The IRS generally has 3 years after you file to assess more tax - 6 years if you left out more than 25% of your income. Keep records at least that long. IRC §6501
"IRC" is the Internal Revenue Code, Title 26 of the U.S. Code; each citation links to that section on Cornell's Legal Information Institute. 2026 dollar amounts are from IRS Rev. Proc. 2025-32, Rev. Proc. 2025-19, Notice 2025-67, and the Social Security Administration. This page is general education, not tax advice - state taxes, and many special cases, aren't covered.
Ready to use these accounts? Investing Basics walks through opening one, and the Cash Equivalents calculator shows how tax changes what your savings really earn.