By: Lim Chan

June 8, 2025

A wise man once said, “In this world, nothing is certain except death and taxes.” Many of you might recognize the quote, and some of you might even know exactly who said it, so well, in fact, that his face might be sitting in your wallet right now. Yes, that man is Benjamin Franklin, the iconic figure on the $100 bill.

That quote couldn’t be more accurate. If you need proof, just look at Al Capone, the infamous mafia boss who evaded justice for years, only to be brought down by tax evasion. Since taxes are unavoidable, let’s dive into how the federal income tax system works.

Progressive Tax System

The U.S. uses a progressive tax system, meaning higher tax rates are applied to higher levels of income. Income is divided into brackets, with each segment having a different tax rate. Below are the tax rates and brackets for single taxpayers in 2024.

Federal Income Tax Calculation

The calculation of a single taxpayer’s taxes involves five main steps.

1. Calculate Gross Income:

Gross income is the total amount of money earned in a year before any income taxes are deducted.

2. Calculate Adjusted Gross Income (AGI):

AGI is calculated by subtracting certain deductions from gross income. Examples of deductions include retirement contributions, student loan interest, and other eligible expenses.

3. Calculate Taxable Income:

Taxable income is calculated by subtracting either the standard deduction or itemized deductions from AGI. The standard deduction for a single taxpayer in 2024 is $14,600.

4. Apply Tax Brackets:

Based on the taxable income, the applicable tax rates are applied according to the tax brackets.

5. Factor in Tax Credits:

Eligible tax credits are applied to reduce the final tax liability.

Federal Income Tax Calculation Example

Let’s assume there is a single taxpayer who earned $130,000 in 2024 and spent a total of $23,000 on retirement contributions, student loan interest, and other deductions from gross income. They have decided to take the standard deduction from AGI. Additionally, they purchased a brand-new electric car that qualified for a full $7,500 new clean vehicle tax credit. How much will their 2024 taxes be?

Step 1: Gross Income: $130,000

Step 2: AGI: AGI = Gross Income- deductions

=$130,000-$23,000=$107,000

Step 3: Taxable Income: Taxable Income = AGI-Standard Deduction

=$107,000-$14,600=$92,400

Step 4: Using the 2024 federal tax brackets for single filers, we break the taxable income into segments:

• 10% on first $11,600 → $1,160

• 12% on $11,601 – $47,150 → ($47,150 – $11,600) * 12% = $4,266

• 22% on $47,151 – $100,525 → ($92,400 – $47,150) * 22% = $9,955

Total federal tax liability=$1,160+$4,266+$9,955=$15,381

Step 5: Factor in Tax Credits: The new clean vehicle tax credit is non-refundable, meaning it only reduces tax liability (not below zero).

Final federal tax liability=$15,381-$7,500=$7881

*This example assumes no additional tax credits, deductions, or state taxes.

Final Thoughts

Many people mistakenly believe that once their income reaches a certain threshold, all of it is taxed at that rate. In reality, taxable income is divided into segments, with each portion taxed at different rates. This article aims to clarify the federal income tax system, empowering readers to make informed financial decisions and strategically manage their spending.