The American Tax Burden: Who Pays What in 2026 Report

The 2026 tax filing season for tax year 2025 is underway. The IRS expects to process more than 150 million individual income tax returns between January and April, according to the IRS Data Book. Federal tax collections reached $4.9 trillion in fiscal year 2025, per Congressional Budget Office projections, funding everything from defense and Social Security to infrastructure and scientific research.

But the tax system is anything but simple. The federal individual income tax code alone runs to thousands of pages, and the interplay between marginal brackets, deductions, credits, payroll taxes, capital gains rates, and state taxes means that two households earning the same gross income can pay dramatically different amounts. Understanding who pays what, and why, is essential for anyone trying to make informed financial decisions.

This report examines five dimensions of the American tax burden:

1. Federal income tax brackets and effective rates, showing how the marginal rate you hear about differs from what you actually pay
2. Who bears the tax burden, with data showing the top 1% pays 45.8% of all federal income taxes while the bottom 50% pays 2.3%
3. Deductions and credits, covering the shift to the standard deduction and which credits put the most money back in pockets
4. State tax disparities, where living in the right state can save you thousands annually
5. The $688 billion tax gap, representing the difference between what is owed and what is actually collected

All data is sourced from the IRS Statistics of Income, the Tax Foundation, the Congressional Budget Office, and the Joint Committee on Taxation.

The federal income tax uses a progressive bracket system with seven marginal rates, as established by IRS Revenue Procedure 2024-40. For tax year 2025 (filing in 2026), the brackets for single filers are:

• 10% on income up to $11,925
• 12% on income from $11,926 to $48,475
• 22% on income from $48,476 to $103,350
• 24% on income from $103,351 to $197,300
• 32% on income from $197,301 to $250,525
• 35% on income from $250,526 to $626,350
• 37% on income over $626,350

For married couples filing jointly, each bracket threshold is roughly doubled: the 10% bracket covers income up to $23,850, the 12% bracket extends to $96,950, and so on up to the 37% bracket starting at $751,600.

The standard deduction for 2025 is $15,000 for single filers, $30,000 for married filing jointly, and $22,500 for heads of household. This means a single filer earning $50,000 in gross income would first subtract the $15,000 standard deduction, leaving $35,000 in taxable income.

A critical concept most people misunderstand: The marginal rate is not the rate you pay on all your income. It is only the rate on the last dollar earned. A single filer earning $75,000 in gross income has $60,000 in taxable income (after the $15,000 standard deduction). Their federal tax would be approximately $8,817: 10% on the first $11,925 ($1,193), 12% on the next $36,550 ($4,386), and 22% on the remaining $11,525 ($2,536). That works out to an effective rate of about 11.8% on gross income, not 22%.

This gap between marginal and effective rates is one of the most misunderstood aspects of the tax code. Many workers turn down raises or overtime because they believe they will "move into a higher bracket" and take home less money. This is never true under a progressive tax system. Only the income above each threshold is taxed at the higher rate.

The distribution of the federal income tax burden is heavily concentrated at the top. According to Tax Foundation analysis of IRS Statistics of Income data (most recent complete data from tax year 2022):

• Top 1% (adjusted gross income above $682,577): Paid 45.8% of all federal income taxes
• Top 5% (AGI above $252,840): Paid 66.0%
• Top 10% (AGI above $169,800): Paid 76.0%
• Top 25% (AGI above $99,200): Paid 89.0%
• Top 50% (AGI above $46,637): Paid 97.7%
• Bottom 50% (AGI below $46,637): Paid 2.3%

These numbers tell an important but incomplete story. They cover only the federal individual income tax, which is the most progressive component of the tax system. When you include all federal taxes, particularly payroll taxes (Social Security and Medicare), the picture changes significantly.

A worker earning $50,000 pays 7.65% in payroll taxes ($3,825), with their employer matching that amount. Social Security taxes are capped at $176,100 in 2025, meaning someone earning $500,000 pays the same Social Security tax as someone earning $176,100. This cap makes payroll taxes regressive: they take a larger percentage from lower earners.

The Congressional Budget Office's Distribution of Household Income report calculates total federal tax rates (income + payroll + excise + corporate tax allocated to capital owners). Under this broader measure:

• The bottom 20% of households pay an average total federal tax rate of 1.9% (negative income tax rate offset by payroll taxes)
• The middle 20% pay 13.5%
• The top 20% pay 26.2%
• The top 1% pay 32.0%

The system is still progressive, but less so than income tax alone suggests. A middle-income family pays a meaningful amount in taxes once payroll taxes are included, even if their federal income tax bill is relatively small.

The Tax Cuts and Jobs Act of 2017 (TCJA) fundamentally changed how Americans file taxes by nearly doubling the standard deduction. Before TCJA, roughly 30% of taxpayers itemized their deductions. After TCJA took effect in 2018, that number dropped to about 10%, according to Tax Foundation analysis.

For tax year 2025, the standard deduction amounts are:

• Single: $15,000
• Married Filing Jointly: $30,000
• Head of Household: $22,500
• Additional for age 65+ or blind: $1,600 (married) or $2,000 (single)

For the approximately 10% of filers who still itemize (generally those with higher incomes, large mortgages, or significant charitable giving), the most common deductions are:

1. State and local taxes (SALT): Capped at $10,000 since 2018. This cap particularly affects residents of high-tax states like New York, California, and New Jersey. Before the cap, many high-income filers in these states deducted $30,000-$50,000+ in SALT. The cap alone pushed millions of filers to the standard deduction.
2. Mortgage interest: Deductible on up to $750,000 of mortgage debt (down from $1 million pre-TCJA). The average mortgage interest deduction for those who claim it is approximately $12,500.
3. Charitable contributions: Deductible up to 60% of AGI for cash donations to qualified charities. In tax year 2022, itemizing filers claimed an average of $8,200 in charitable deductions.
4. Medical expenses: Deductible only to the extent they exceed 7.5% of AGI. For a household with $80,000 AGI, only medical expenses above $6,000 are deductible.

The average total itemized deduction is approximately $38,000 for those who itemize, per IRS SOI data. This means the typical itemizer saves roughly $8,000 beyond what they would get from the standard deduction ($38,000 - $30,000 MFJ = $8,000 additional deduction, saving $1,760-$2,960 depending on bracket).

While deductions reduce your taxable income, tax credits reduce your actual tax bill dollar for dollar, making them significantly more valuable. Some credits are "refundable," meaning you receive the money even if your tax liability is zero. Here are the most impactful credits for the 2025 tax year:

Earned Income Tax Credit (EITC)

The EITC is the single largest anti-poverty program delivered through the tax code. For tax year 2025, the maximum credit is $7,830 for a family with three or more qualifying children. Approximately 25 million tax filers claim the EITC annually, with total claims exceeding $64 billion per year, per IRS EITC data. Income limits for 2025: $59,899 (three+ children, married filing jointly), $56,004 (two children), $49,084 (one child), $18,591 (no children). The credit is fully refundable.

Child Tax Credit (CTC)

The CTC provides up to $2,000 per qualifying child under 17. Of this, $1,700 is refundable as the Additional Child Tax Credit (ACTC) for 2025. The credit begins phasing out at $200,000 AGI for single filers ($400,000 for MFJ). Total CTC claims exceed $107 billion annually across all qualifying families, making it the largest dollar-value credit in the individual tax code, per Joint Committee on Taxation estimates.

Education Credits

Two credits help offset higher education costs. The American Opportunity Tax Credit (AOTC) provides up to $2,500 per year for the first four years of college (40% refundable), with income limits of $80,000 single/$160,000 MFJ. The Lifetime Learning Credit provides up to $2,000 per year for any post-secondary education with no limit on years claimed. Combined education credits total approximately $16 billion per year.

Premium Tax Credit

For individuals purchasing health insurance through the ACA marketplace, the Premium Tax Credit (PTC) subsidizes premiums based on income. For 2025, enhanced subsidies cap premiums at 8.5% of income. Total PTC claims reach approximately $32 billion annually, per IRS SOI data.

Child and Dependent Care Credit

This credit covers 20-35% of up to $3,000 in childcare expenses for one child ($6,000 for two or more), yielding a maximum credit of $2,100. Unlike the expanded 2021 version, the current credit is not refundable. About 6 million households claim this credit, totaling approximately $5 billion.

Saver's Credit (Retirement Savings Contributions Credit)

Low and moderate-income workers who contribute to a retirement account (401(k), IRA, etc.) can claim a credit of 10-50% of contributions up to $2,000 ($4,000 for MFJ), yielding a maximum credit of $1,000 per person ($2,000 per couple). Income limit for 2025: $38,250 single / $76,500 MFJ for the 50% rate.

One of the most significant features of the tax code is the preferential treatment of investment income. Long-term capital gains (assets held longer than one year) and qualified dividends are taxed at rates of 0%, 15%, or 20%, depending on taxable income, rather than at ordinary income tax rates that reach up to 37%.

For tax year 2025, the long-term capital gains brackets are:

• 0%: Taxable income up to $48,350 (single) / $96,700 (MFJ)
• 15%: Taxable income from $48,351 to $533,400 (single) / $600,050 (MFJ)
• 20%: Taxable income above $533,400 (single) / $600,050 (MFJ)

Additionally, the Net Investment Income Tax (NIIT) adds 3.8% on investment income for individuals with modified AGI above $200,000 (single) or $250,000 (MFJ). This means the maximum federal tax rate on long-term capital gains is 23.8% (20% + 3.8% NIIT).

Compare this to the maximum rate on wage income: 37% income tax + 2.35% Medicare tax (including the 0.9% additional Medicare tax above $200K) = 39.35%. The 15.55 percentage-point difference between the top rate on wages (39.35%) and the top rate on long-term capital gains (23.8%) is a central feature of the tax code, per Tax Foundation analysis.

Proponents argue the lower rate encourages investment and risk-taking. Critics point out that it primarily benefits the wealthy: the CBO reports that the top 1% of households receive approximately 75% of all long-term capital gains income. The 0% bracket, however, is genuinely useful for middle-income retirees and workers in lower brackets who can sell appreciated assets tax-free.

Short-term capital gains (assets held one year or less) receive no preferential treatment and are taxed as ordinary income at rates up to 37%.

Where you live has an enormous impact on your total tax burden. Nine states levy no personal income tax at all: Alaska, Florida, Nevada, New Hampshire (interest and dividends only, phased out by 2027), South Dakota, Tennessee, Texas, Washington, and Wyoming, according to the Tax Foundation's 2025 state tax data.

At the other end, several states impose top marginal rates above 10%:

• California: 13.3% (on income above $1 million, with a 1% mental health surcharge)
• Hawaii: 11.0% (on income above $200,000)
• New York: 10.9% (in New York City, the combined state + city rate can reach 14.8%)
• New Jersey: 10.75% (on income above $1 million)
• Oregon: 9.9% (on income above $125,000)
• Minnesota: 9.85% (on income above $193,240)

Thirteen states use a flat tax rate, including Colorado (4.4%), Illinois (4.95%), Indiana (2.95%), Michigan (4.25%), and North Carolina (3.99%). Flat taxes are simpler but less progressive, as the same rate applies whether you earn $30,000 or $3 million.

For a concrete comparison: a household earning $100,000 in gross income would owe approximately $0 in state income tax in Texas or Florida, but roughly $5,900 in California, $5,100 in New York (outside NYC), or $4,950 in Illinois. Over a 30-year career, that difference compounds to $150,000-$180,000 in additional taxes.

However, states without income taxes often compensate with higher property taxes and/or sales taxes. Texas, for example, has some of the highest property tax rates in the nation (averaging 1.68% vs. the national average of 1.07%). Washington state has no income tax but levies a 6.5% state sales tax plus local rates that can push the total above 10%. The total state and local tax burden, when all taxes are included, narrows the gap between "low-tax" and "high-tax" states.

The IRS estimates the gross tax gap at $688 billion for tax year 2021 (the most recent estimate, published in 2024), according to IRS Publication 1415. This is the difference between what taxpayers owe and what they voluntarily pay on time. The net tax gap, after enforcement actions and late payments, is approximately $606 billion.

The three components of the tax gap are:

• Underreporting of income: $542 billion (79% of the total gap). This is the largest driver by far. Taxpayers report less income than they actually received or claim more deductions than they are entitled to.
• Non-filing: $77 billion (11%). Individuals who are required to file a return but do not.
• Underpayment: $68 billion (10%). Taxpayers who file but do not pay their full liability.

The composition of underreporting is revealing. According to IRS data, income subject to substantial third-party reporting (W-2 wages, interest, dividends) has a compliance rate of approximately 99%. Income with little or no third-party reporting (sole proprietor income, rental income, partnership income) has a compliance rate of roughly 55%. This is not primarily about intentional evasion. Complex tax situations with multiple income sources, pass-through entities, and ambiguous deduction rules create opportunities for underreporting.

IRS enforcement has declined substantially. The audit rate for all individual returns was just 0.4% in FY2022, down from 1.1% in 2010, per TRAC Syracuse University data. For taxpayers earning over $1 million, the audit rate plummeted from 8.4% in 2010 to 1.1% in 2022. IRS staffing fell by approximately 20% between 2010 and 2022 due to budget cuts.

The Inflation Reduction Act of 2022 allocated $80 billion in new IRS funding over 10 years, aimed at increasing enforcement, particularly among high-income taxpayers and large corporations. Early results show increased collections, but the funding has faced political challenges and partial clawbacks from subsequent legislation.

The single most consequential tax policy question for 2026 is the fate of the Tax Cuts and Jobs Act. Many of TCJA's individual tax provisions are scheduled to expire after December 31, 2025, per Tax Foundation analysis. If Congress does not act to extend or replace these provisions, taxpayers will see significant changes for tax year 2026 (filing in 2027):

• Standard deduction: Would drop from $30,000 (MFJ) to approximately $16,500, as the near-doubling of the standard deduction was a TCJA provision
• Personal exemptions: Would return at approximately $5,300 per person (eliminated under TCJA), partially offsetting the lower standard deduction for larger families
• Marginal tax rates: Would revert to the pre-TCJA structure with a top rate of 39.6% (up from 37%) and higher rates in several other brackets
• SALT cap: The $10,000 cap on state and local tax deductions would be removed, benefiting residents of high-tax states
• Child Tax Credit: Would drop from $2,000 to $1,000 per child, with a lower refundable portion
• Estate tax exemption: Would be cut roughly in half, from approximately $14 million to about $7 million per person

For a married couple with two children earning $100,000, the Tax Policy Center estimates the combined effect would be a tax increase of approximately $3,300 per year. The standard deduction decrease is partially offset by the return of personal exemptions, but the lower CTC and higher rates would still result in a net increase for most middle-income families.

Congress is actively debating various extension scenarios. Full extension would add approximately $4.6 trillion to the deficit over 10 years, per CBO projections. Regardless of what Congress decides, taxpayers should focus on maximizing deductions and credits available now, making retirement contributions before any potential changes, and consulting a tax professional if they have complex situations.

Regardless of how tax policy evolves, these strategies can reduce your tax burden based on current law. Each is grounded in specific IRS provisions and applicable to the 2025 tax year:

1. Maximize retirement account contributions. 401(k) contributions up to $23,500 in 2025 ($31,000 if age 50+, $34,750 for ages 60-63 under SECURE 2.0's super catch-up) reduce taxable income dollar-for-dollar. IRA contributions up to $7,000 ($8,000 if 50+) may also be deductible. A worker in the 22% bracket who contributes $23,500 to a 401(k) saves $5,170 in federal taxes immediately. Use our Retirement Savings Calculator to model your specific situation.
2. Use the HSA triple tax advantage. If you have a high-deductible health plan, HSA contributions are tax-deductible (up to $4,300 single / $8,550 family for 2025), grow tax-free, and can be withdrawn tax-free for medical expenses. No other account offers all three benefits. Read our HSA Strategy Guide.
3. Harvest tax losses in taxable accounts. Selling investments at a loss can offset capital gains dollar-for-dollar, plus up to $3,000 in ordinary income per year, with unlimited carryforward. This is particularly valuable in down-market years. Read our Tax-Loss Harvesting Guide.
4. Bunch charitable donations in alternating years. If your annual charitable giving is near the standard deduction threshold, consider doubling up donations in one year (to itemize) and taking the standard deduction in the next. Donor-advised funds make this easy: contribute a large amount in one year for the tax deduction, then distribute to charities over multiple years.
5. Claim every eligible credit. Review eligibility for the EITC, CTC, education credits, Saver's Credit, and Premium Tax Credit. The IRS estimates that millions of eligible taxpayers fail to claim the EITC each year, leaving billions on the table.
6. Consider strategic Roth conversions. Converting traditional IRA funds to Roth in years when your income is lower (between jobs, early retirement, sabbatical) can save thousands in lifetime taxes. Read our Roth Conversion Guide.
7. Time capital gains to the 0% bracket. If your taxable income is below $48,350 (single) or $96,700 (MFJ), you can realize long-term capital gains at a 0% federal rate. This is especially useful for retirees with modest income.
8. Use 529 plans for education expenses. While contributions are not federally deductible, 34 states offer a state tax deduction or credit. Earnings grow tax-free and withdrawals for qualified education expenses are tax-free. Up to $10,000/year can be used for K-12 tuition.
9. Track all business deductions if self-employed. Home office deduction (simplified: $5/sq ft, max $1,500, or actual expenses), vehicle mileage (67 cents/mile for 2025), equipment (Section 179 deduction up to $1,250,000), and health insurance premiums are all deductible. Read our Side Hustle Tax Guide.
10. File on time and electronically. Late filing penalties are 5% of unpaid tax per month (up to 25%). E-filing reduces errors and speeds refunds. If you cannot file by April 15, file for an automatic 6-month extension (but pay any estimated tax owed to avoid penalties).

Financial Disclaimer: This information is for educational purposes only and does not constitute tax advice. Tax situations vary significantly based on individual circumstances. Consult a qualified tax professional for advice specific to your situation.

This report draws primarily from the following data sources:

• IRS Statistics of Income (SOI): The most recent complete individual tax data is for tax year 2022, released in 2024. Tax year 2023 and 2024 data is not yet available. Where noted, we use 2025 bracket amounts from IRS Revenue Procedure 2024-40.
• Tax Foundation: Independent tax policy nonprofit that analyzes IRS data and models policy scenarios. Their calculations of income shares and effective rates are used throughout.
• Congressional Budget Office (CBO): Non-partisan agency providing total federal tax burden estimates that include payroll, excise, and allocated corporate taxes.
• Joint Committee on Taxation (JCT): Congressional committee providing revenue estimates for tax legislation and credit utilization data.
• TRAC Syracuse University: Independent research center tracking IRS enforcement data including audit rates by income level.

Limitations:

• Federal income tax data lags by 2-3 years. The SOI data cited is from tax year 2022; actual 2025 figures may differ.
• Effective tax rate calculations depend on what income measure is used (AGI vs. gross income vs. total income). Different sources may produce slightly different effective rates for the same income level.
• State tax comparisons use top marginal rates, which may not reflect the tax experience of most residents in those states.
• TCJA expiration scenarios are projections based on current law. Actual legislation may include partial extensions, modifications, or entirely new provisions.
• The tax gap estimate of $688 billion is an IRS model-based projection, not a direct measurement. Actual uncollected taxes may be higher or lower.
• This report covers individual income taxes and does not address corporate taxes, estate taxes (except briefly), or excise taxes in depth.