Cecily Zamora
The 16th Amendment, which came into effect on March 15, 1913, established Congress's right to impose a federal income tax. This amendment was passed by Congress on July 2, 1909, and ratified on February 3, 1913, and it granted Congress the authority to levy taxes on incomes without having to determine them based on population. The federal income tax rates and brackets for 2025 range from 10% to 37%, with seven federal tax brackets in total. These brackets determine the tax rates individuals pay based on their income, with higher incomes falling into higher tax brackets. The specific rates and brackets can vary by state, with some states like Colorado having a flat tax rate and others like Wyoming having no state income tax.
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What You'll Learn
Federal income tax rates and brackets
The US has a progressive tax system at the federal level, with seven tax brackets. As income increases, it gradually moves into a higher bracket with a higher tax rate. This means that different portions of an individual's total income are taxed at different rates. The marginal tax rate is the rate paid on the highest income bracket reached. However, only the income within this bracket is taxed at the higher rate; the rest is taxed at the lower rates.
For example, in 2024, a single filer with $50,000 of taxable income would pay 10% on the first $11,600, 12% on the income between $11,601 and $47,150, and 22% on the rest. Their total tax bill would be approximately $6,053, which is about 12% of their taxable income.
The federal income tax rates for 2025 range from 10% to 37%. The 10% and 12% income tax brackets will receive an additional adjustment for inflation in 2026 (for taxes filed in 2027). This will allow more income to be taxed at lower rates.
It is important to note that state and federal tax brackets differ. While federal brackets are set by the IRS, each state sets its own brackets, with some having a progressive system, others taxing all income at the same rate, and some having no income tax.
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State income tax rates
State income tax is imposed on income earned in that particular state, funding state budgets. Residents who earn income in multiple states may need to file multiple state returns. State income tax rules vary, and taxable income is defined by each state. Most states conform to federal rules for determining the characterisation of business entities. States are prohibited from taxing income from federal bonds or other federal obligations. Many states also exempt income from state or local bonds, Social Security benefits, and other income types.
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Long-term capital gains
The Net Investment Income Tax (NIIT) applies to certain investment income for individuals, estates, and trusts with income above a set threshold. The NIIT is calculated at 3.8% of the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds the threshold. A 3.8% 'unearned income Medicare contribution' tax also applies to individuals subject to US taxation (excluding non-resident aliens) when their net investment income or modified adjusted gross income exceeds a certain threshold.
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Net investment income tax
The Net Investment Income Tax (NIIT) is imposed by section 1411 of the Internal Revenue Code. The NIIT came into effect on January 1, 2013, and applies to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. The NIIT affects income tax returns of individuals, estates, and trusts, beginning with their first tax year on or after January 1, 2013.
Net investment income generally includes interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. It does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income. Additionally, net investment income does not include any gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes.
The NIIT is calculated at 3.8% of the lesser of the net investment income or the amount by which the modified adjusted gross income (MAGI) exceeds the threshold. The MAGI is generally defined as adjusted gross income (AGI) for regular income tax purposes, increased by the foreign earned income exclusion, and adjusted for certain deductions related to foreign earned income. For individual taxpayers who haven't excluded any foreign earned income, their MAGI is generally the same as their regular AGI.
The Net Investment Income Tax does not apply to all trusts. Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code are not subject to the NIIT. This includes charitable trusts, qualified retirement plan trusts, and charitable remainder trusts. Trusts that are classified as "grantor trusts" under sections 671-679 are also not subject to the NIIT.
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Tax exemptions
The 16th Amendment to the U.S. Constitution, ratified in 1913, established Congress's right to impose a federal income tax. This amendment states:
> The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The purpose of federal income tax is to generate revenue for the federal budget. The amount of tax an individual pays is based on their income, which is taxed in layers called tax brackets. As an individual's income increases, the tax rate on the next layer of income is higher. However, when an individual's income jumps to a higher tax bracket, they only pay the higher rate on the portion of their income that falls within that new bracket.
In 2025, there are seven federal tax rates in place: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top marginal income tax rate of 37% applies to single filers with taxable income above $626,350 and married couples filing jointly with taxable income above $751,600.
There are various tax exemptions and deductions that individuals can take advantage of to reduce their taxable income. For example, the standard deduction is the amount of income that can be excluded from taxes before the tax rates mentioned above apply. In 2025, the standard deduction increased by $400 for single filers and $800 for joint filers. Seniors over 65 may claim an additional standard deduction of $2,000 for single filers and $1,600 for joint filers.
Another important exemption is the alternative minimum tax (AMT), which was created in 1969 to close tax loopholes for those in higher tax brackets. The AMT exemption amount for 2025 is $88,100 for single filers and $137,000 for married couples filing jointly. The AMT exemption phases out for high-income taxpayers, starting at $500,000 for single filers and $1,000,000 for married couples filing jointly.
Additionally, there are exemptions for certain types of income, such as gifts. In 2025, the first $19,000 of gifts to any person are excluded from tax, and this exclusion is increased to $190,000 for gifts to non-citizen spouses.
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Frequently asked questions
The federal income tax rates for individuals in the US range from 10% to 37%.
Tax brackets divide portions of your income into different windows based on filing status. These brackets determine which tax rates you pay. For example, in 2025, a single filer with a taxable income of $50,000 will pay a combination of 10%, 12%, and 22%.
The standard deduction is the amount of income you can exclude from taxes before tax rates apply. For 2025, the standard deduction has increased following new legislation.
Effective tax rates are typically lower than marginal rates due to various deductions, and some people may even have a negative liability. The effective tax rate is the percentage of tax paid on your taxable income.
US income tax law comes from a number of sources, including the Internal Revenue Code (IRC), which is written by the US Congress through legislation, and treaties, which are written in conjunction with other countries. The 16th Amendment, ratified in 1913, established Congress's right to impose a federal income tax.
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