Income Tax
Definition
Tax the government charges on your earnings. Federal, state (if applicable), and local taxes. Progressive tax system: higher earners pay higher percentages. Standard deduction reduces taxable income for most people.
Why It Matters
Income tax is your largest expense for most people. Understanding how brackets work (marginal vs effective rates) helps you optimize taxes. A small business owner might save $5,000-20,000 annually with basic tax planning.
Example
Earn $100,000. Federal tax brackets: 10% on first $11,000, 12% on next $44,000, 22% on remaining $45,000. Total tax approximately $12,100. Your effective tax rate is 12.1% even though marginal is 22%.