Understanding Taxes
Taxes are one of those things nobody teaches you but everyone expects you to understand. Let's fix that.
How Income Tax Actually Works
The most important thing to understand is that the US uses a marginal tax system. This means different portions of your income are taxed at different rates.
Common misconception: "If I get a raise that pushes me into a higher tax bracket, I'll take home less money." This is false. Only the money above the threshold is taxed at the higher rate.
Adjust your income to see how it's actually taxed across brackets.
2026 Federal Tax Brackets (Single Filer)
| Tax Rate | Income Range | You Pay |
|---|---|---|
| 10% | $0 - $12,400 | 10% of income |
| 12% | $12,401 - $50,400 | $1,240 + 12% of amount over $12,400 |
| 22% | $50,401 - $105,700 | $5,800 + 22% of amount over $50,400 |
| 24% | $105,701 - $201,775 | $17,966 + 24% of amount over $105,700 |
| 32% | $201,776 - $256,225 | $41,024 + 32% of amount over $201,775 |
| 35% | $256,226 - $640,600 | $58,448 + 35% of amount over $256,225 |
| 37% | $640,601+ | $192,979 + 37% of amount over $640,600 |
Tax brackets are for tax year 2026 (filed in 2027). Brackets are adjusted annually for inflation. Sources: IRS, Tax Foundation
Key Tax Concepts
Gross vs. Net Income
- Gross income: Your total earnings before any deductions
- Net income (take-home pay): What you actually receive after taxes and deductions
W-2 vs. 1099
- W-2: You're an employee. Employer withholds taxes for you.
- 1099: You're a contractor. You're responsible for paying your own taxes (including self-employment tax).
Standard Deduction vs. Itemizing
The standard deduction ($16,100 for single filers in 2026) reduces your taxable income automatically. You only need to itemize if your deductions (mortgage interest, charitable donations, etc.) exceed this amount.
For most young professionals: The standard deduction makes the most sense. It's simpler and usually better, unless you own a home with a large mortgage.
Tax-Advantaged Accounts
These accounts reduce your tax burden:
| Account | Tax Benefit |
|---|---|
| Traditional 401(k) / IRA | Contributions reduce taxable income now |
| Roth 401(k) / IRA | Withdrawals are tax-free in retirement |
| HSA | Triple tax advantage: deductible contributions, tax-free growth, tax-free withdrawals for medical |
When to File
- Tax year: January 1 - December 31
- Filing deadline: April 15 (or next business day)
- Extension available: Gives you until October 15 to file (but you still owe by April 15)
Common Deductions & Credits
Deductions (reduce taxable income)
- Student loan interest (up to $2,500)
- Traditional IRA contributions
- HSA contributions
Credits (reduce actual tax owed - more valuable!)
- Earned Income Tax Credit (EITC) - for lower incomes
- Lifetime Learning Credit - for education expenses
- Saver's Credit - for retirement contributions (lower incomes)
Pro tip: A $1,000 tax credit saves you $1,000. A $1,000 deduction saves you $1,000 × your tax rate (e.g., $220 if you're in the 22% bracket). Credits are more valuable.
How to File Your Taxes
You have several options for filing your tax return, ranging from completely free to full-service.
Free Options
- IRS Free File — Truly free federal filing if your AGI is $84,000 or less. Uses partner software like TaxAct and TaxSlayer.
- IRS Direct File — New program directly from the IRS. Completely free, currently available in select states.
- Cash App Taxes — 100% free federal and state filing with no income limits.
Paid Options
For more complex returns or if you want extra guidance:
- FreeTaxUSA — Federal filing is free, state is ~$15. Excellent value and highly rated.
- TaxSlayer — Budget-friendly with a free tier for simple returns.
- TaxAct — Good middle ground between price and features.
- TurboTax — Most popular option with the best interface. Great for complex situations, but the most expensive.
For most young professionals with straightforward W-2 income: Start with IRS Free File or FreeTaxUSA. You probably don't need TurboTax's premium features.