Income tax
How U.S. Income Tax Works
The federal government and most state governments impose an income tax on individuals. The system is progressive, meaning the tax rate increases as your income rises, with the top federal rate for 2025 set at 37%.
Here's the key concept: you don't pay your top rate on all your income. Each dollar is taxed only at the rate for the bracket it falls into. So if you're a single filer earning $60,000, the first $11,925 is taxed at 10%, the next chunk at 12%, and only the portion above $48,475 is taxed at 22%.
Marginal vs. effective rate: Your marginal rate is the rate on your last dollar earned. Your effective rate - the average you actually pay - is almost always much lower. For example, a single filer earning $60,000 has a marginal rate of 22%, but their effective federal rate is closer to 13%.
2025 Federal Tax Brackets
The federal income tax has seven brackets in 2025: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Here's what they look like for the most common filing statuses:
Single filers:
Taxable Income (USD) |
Tax Rate |
|---|---|
$0 – $11,925 |
10% |
$11,926 – $48,475 |
12% |
$48,476 – $103,350 |
22% |
$103,351 – $197,300 |
24% |
$197,301 – $250,525 |
32% |
$250,526 – $626,350 |
35% |
$626,351+ |
37% |
Standard Deduction for 2025
The standard deduction reduces your taxable income by a flat amount before you calculate your tax. For 2025, the standard deduction is $15,750 for single filers and married people filing separately, $23,625 for heads of household, and $31,500 for married couples filing jointly.
These amounts are higher than in previous years, thanks to the OBBBA, which retroactively increased the standard deduction by $750 for single filers and $1,500 for joint filers starting in the 2025 tax year.
Key Changes from the One Big Beautiful Bill Act
The OBBBA, signed on July 4, 2025, brought several significant changes beyond making the TCJA provisions permanent:
SALT deduction cap raised to $40,000. The cap on state and local tax (SALT) deductions increased from $10,000 to $40,000, effective starting in 2025. This is especially impactful for homeowners in high-tax states like New York, California, and New Jersey. The $40,000 cap phases down for individual taxpayers making above $500,000, at a rate of 30%. The higher cap is temporary — it increases by 1% annually through 2029 and reverts to $10,000 in 2030.
No tax on tips and overtime: Up to $25,000 in tips and $12,500 in overtime are deductible for individuals with incomes under $150,000.
Permanent tax bracket structure: The seven-bracket system and current rates are no longer set to expire, providing long-term certainty for tax planning.
The SALT cap increase only benefits you if you itemize your deductions. If your total itemized deductions (SALT, mortgage interest, charitable contributions, etc.) don't exceed your standard deduction, you're better off taking the standard deduction instead.
State Income Taxes
Federal income tax is only part of the picture. Most states also impose some personal income tax, with the exception of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
State tax rates vary widely. Some states use a flat rate, while others have progressive bracket systems similar to the federal one. Nine states cut their income tax rates at the start of 2026, continuing a nationwide trend toward lower state taxes.
Keep in mind that states without income tax often compensate with higher sales taxes, property taxes, or other fees. The total tax burden depends on your full financial picture, not just the income tax rate.
Capital Gains Tax
Not all income is taxed the same way. The maximum federal tax rate on long-term capital gains (assets held for more than 12 months) and qualified dividends is 20% - significantly lower than the top ordinary income rate of 37%.
Short-term capital gains - from assets held one year or less - are taxed as ordinary income at your regular bracket rate.
Additionally, a 3.8% net investment income tax applies to individuals with income above certain thresholds: $200,000 for single filers and $250,000 for joint filers.
How to Reduce Your Tax Bill
There are several legitimate strategies to lower your federal income tax:
Maximize retirement contributions: Contributions to traditional 401(k) plans and IRAs reduce your taxable income. For 2025, the 401(k) contribution limit is $23,500 ($31,000 if you're 50 or older).
Use tax credits: Credits reduce your tax bill dollar-for-dollar, making them more powerful than deductions. Common credits include the Child Tax Credit, Earned Income Tax Credit, and education credits.
Health Savings Account (HSA): If you have a high-deductible health plan, HSA contributions are deductible, grow tax-free, and can be withdrawn tax-free for medical expenses.
Charitable giving: Donations to qualified charities are deductible if you itemize. Consider bunching charitable donations into a single year to exceed the standard deduction threshold.
Conclusion:
Filing your income tax return doesn't have to be stressful. The key is knowing which bracket you fall into, whether to itemize or take the standard deduction, and which credits and deductions apply to your situation. The 2025 tax year brings some genuinely beneficial changes — the higher SALT cap, expanded standard deduction, and new senior bonus deduction can all put real money back in your pocket. But these provisions are temporary, so it's worth taking advantage of them while they last.
