How US Income Tax Works: Brackets, Deductions and Credits
Federal income tax is less mysterious than it looks. Here's how tax brackets really work, the 2026 standard deduction and brackets, the difference between deductions and credits, the new deductions for tips, overtime, seniors and car loan interest, and how to file.
By Pond.com editors Updated 5 min read
Quick answer
- The US uses marginal tax brackets, so each rate applies only to the income within that bracket, not to all your income.
- For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.
- Deductions lower your taxable income; credits cut your tax bill dollar for dollar.
- New deductions for 2025 through 2028 cover some tips, overtime pay and car loan interest, plus an extra deduction for people 65 and older.
- Taxes for the 2026 tax year are normally due in April 2027. Free filing help is available through IRS Free File and VITA if your income qualifies.
Income tax can seem complicated, but the basics are straightforward once you see how the pieces fit together. Understanding them helps you plan, avoid surprises at tax time and make sure you claim every break you're entitled to.
This guide covers federal income tax for the 2026 tax year, which you'll file in 2027. Most states also have an income tax with their own rules. It's general information, not tax advice; for your situation, use IRS resources or a qualified tax professional.
How your tax is calculated
- Start with your total income: wages, self-employment income, interest, dividends, retirement withdrawals and so on.
- Subtract adjustments, such as traditional IRA contributions, HSA contributions and student loan interest, to get your adjusted gross income (AGI).
- Subtract the standard deduction or your itemized deductions (and any other deductions you qualify for) to get your taxable income.
- Apply the tax brackets to your taxable income.
- Subtract tax credits.
- Compare with what you've already paid through paycheck withholding or estimated payments. If you paid more, you get a refund; if less, you owe the difference.
2026 standard deduction
| Filing status | Standard deduction |
|---|---|
| Single or married filing separately | $16,100 |
| Married filing jointly | $32,200 |
| Head of household | $24,150 |
2026 tax brackets
| Rate | Single (taxable income) | Married filing jointly (taxable income) |
|---|---|---|
| 10% | Up to $12,400 | Up to $24,800 |
| 12% | $12,400 – $50,400 | $24,800 – $100,800 |
| 22% | $50,400 – $105,700 | $100,800 – $211,400 |
| 24% | $105,700 – $201,775 | $211,400 – $403,550 |
| 32% | $201,775 – $256,225 | $403,550 – $512,450 |
| 35% | $256,225 – $640,600 | $512,450 – $768,700 |
| 37% | Over $640,600 | Over $768,700 |
How brackets really work
The US uses marginal tax rates. Each rate applies only to the slice of income within its bracket.
Example: a single filer earns $60,000 in wages. After the $16,100 standard deduction, taxable income is $43,900.
- 10% on the first $12,400 = $1,240
- 12% on the next $31,500 = $3,780
- Total: $5,020
This person is in the 12% bracket, but their tax is only about 8.4% of their wages. That's their effective tax rate.
Deductions vs credits
Deductions lower your taxable income. Most people take the standard deduction. You can itemize instead if your itemized deductions are larger, for example:
- Mortgage interest
- State and local taxes (SALT), up to a cap of $40,000 for most filers, which is reduced for high earners
- Charitable donations
- Large medical expenses above a percentage of your income
Credits reduce your tax bill dollar for dollar, so they're usually worth more. Common credits include:
| Credit | Who it's for |
|---|---|
| Child Tax Credit | Up to $2,200 per qualifying child under 17 |
| Earned Income Tax Credit (EITC) | Low- and moderate-income workers, especially with children; can give a refund even if you owe no tax |
| American Opportunity and Lifetime Learning credits | College and other higher education costs |
| Saver's Credit | Lower- and moderate-income people saving for retirement |
| Child and Dependent Care Credit | Daycare and care costs so you can work |
New deductions for 2025 to 2028
The 2025 tax law added several temporary deductions, which you can claim whether or not you itemize. Each phases out at higher incomes.
- Tips: deduct up to $25,000 of qualified tips in occupations that customarily receive them.
- Overtime: deduct up to $12,500 ($25,000 for joint filers) of the extra "half" in time-and-a-half overtime pay.
- Seniors: an extra deduction of up to $6,000 for each taxpayer aged 65 or older.
- Car loan interest: deduct up to $10,000 a year of interest on a loan for a new car assembled in the US. See how car loans work.
Filing your taxes
- Deadline: usually April 15. You can get an automatic six-month extension to file, but not to pay. Any tax owed is still due in April.
- Who must file: most people whose income is above the standard deduction for their filing status, and anyone with $400 or more of net self-employment income.
- Free options: IRS Free File provides free guided software if your income is below the yearly limit, plus free fillable forms for anyone. VITA and TCE sites offer free in-person help if you qualify.
- Keep records of income forms (W-2s and 1099s), receipts for deductions, and copies of your returns for at least three years.
Common questions
The rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. For single filers in 2026, the 10% rate applies to taxable income up to $12,400, 12% up to $50,400, 22% up to $105,700, 24% up to $201,775, 32% up to $256,225, 35% up to $640,600 and 37% above that. Married couples filing jointly have brackets roughly twice as wide.
No. Only the income above the bracket threshold is taxed at the higher rate. A raise always increases your after-tax income, even if part of it is taxed at a higher rate.
Itemize only if your itemized deductions, such as mortgage interest, state and local taxes (up to the cap) and charitable gifts, add up to more than your standard deduction. Most taxpayers take the standard deduction.
A deduction reduces the income you're taxed on, so its value depends on your tax rate. A credit reduces your tax bill directly. A $1,000 credit saves $1,000, while a $1,000 deduction saves $120 for someone in the 12% bracket.
IRS Free File offers free guided tax software if your income is below a set limit, and free fillable forms for anyone. IRS-sponsored VITA and TCE programs offer free in-person help for people with moderate incomes, older adults and people with disabilities.