Federal Income Tax

Definition

Federal income tax is a tax levied by the federal government on individuals' earnings. It is progressive in nature meaning those with higher incomes pay higher rates than those with lower incomes.

Analogy

Imagine a group of friends deciding to buy a shared gift based on their individual allowances. The friend with the highest allowance contributes more towards the gift, while the one with the least contributes less. This is how federal income tax works - those who earn more, pay more.

Related terms

16th Amendment: An amendment to U.S Constitution that allows Congress to levy an income tax without apportioning it among states or basing it on Census results.

Tax Bracket: A range of incomes taxed at a given rate.

Tax Deduction: A reduction in tax obligation from a taxpayer's gross income.