The Basics, Step by Step
Federal income tax in six concepts. That's really all there is to it.
Income
— What you earnedThe IRS wants to know about all money you received during the year — wages from a job (your W-2), freelance or gig income (1099 forms), interest from bank accounts, investment gains, and more. Added together, this is your gross income.
Deductions
— Reducing what gets taxedDeductions lower your taxable income. Everyone gets a standard deduction (a flat amount based on your filing status — $15,000 for single filers in 2025). If your specific expenses like mortgage interest, state taxes, or charitable giving add up to more than that, you can itemize instead. You only use whichever is higher.
Tax Brackets
— Not as scary as they soundThe US uses a progressive tax system. That means your income is taxed in layers, not all at one rate. If you're single and earn $60,000, only the dollars above $48,475 are taxed at 22%. Everything below that is taxed at lower rates (10% and 12%). Moving into a "higher bracket" never means all your income is taxed more — only the portion above each threshold.
Credits
— Dollar-for-dollar savingsTax credits directly reduce the tax you owe (unlike deductions, which reduce taxable income). A $2,000 credit saves you $2,000. Some credits are refundable, meaning if the credit exceeds your tax bill, you get the rest as a refund. The Child Tax Credit ($2,000 per child in 2025) and Earned Income Tax Credit are two of the most valuable.
Withholding & Payments
— You've already been payingIf you have a regular job, your employer withholds federal tax from every paycheck throughout the year. When you file, you're comparing what you already paid (withholding + any estimated payments) against what you actually owe. Overpaid? You get a refund. Underpaid? You owe the difference.
Filing Your Return
— Reporting it all to the IRSFiling is simply telling the IRS: here's what I earned, here's what I can deduct, here are the credits I qualify for, and here's the math. The main form is the 1040. Most people can file electronically for free using IRS Direct File or Free File partners. The deadline is typically April 15.
The Math in 30 Seconds
Key Terms, Decoded
The jargon you'll see on forms and tax software, translated into English.
Your total income minus specific adjustments like student loan interest or IRA contributions. Many tax benefits phase out based on your AGI.
The form your employer sends showing your wages and how much tax was withheld. You get one from each job.
A family of forms for non-wage income: freelance pay (1099-NEC), bank interest (1099-INT), dividends (1099-DIV), etc.
A flat amount you can subtract from income before calculating tax. Most people use this instead of itemizing.
Your category for tax purposes: Single, Married Filing Jointly, Head of Household, etc. It determines your bracket thresholds and deduction amounts.
The rate applied to your last dollar of income. Not your overall rate — just the top bracket your income reaches.
Your actual overall rate — total tax divided by total income. Always lower than your marginal rate.
A credit that can give you money back even if you owe zero tax. The EITC and part of the Child Tax Credit are refundable.
Tax your employer takes from each paycheck and sends to the IRS on your behalf throughout the year.
Earned Income Tax Credit — a valuable refundable credit for low-to-moderate income workers. Many eligible people don't claim it.
How Billion-Dollar Companies Pay $0 in Federal Tax
You've probably heard that some of the biggest corporations in the country pay nothing in federal income tax. It sounds like it can't be real, but it is — and it's completely legal. Here's how they do it.
Carrying Forward Losses
If a company loses money in year one, it can use those losses to offset profits in future years. This is called a “net operating loss carryforward.” Under current law, post-2017 losses can offset up to 80% of taxable income in any given year — and unused losses carry forward indefinitely. A company that lost billions building out warehouses and infrastructure can apply those losses against future profits for years, dramatically reducing its tax bill. The losses were real, and the tax code says you shouldn't pay tax on income that just makes up for earlier losses. The problem is that massive companies can stack years of strategic losses to minimize what they pay for a very long time.
Accelerated Depreciation
When a company buys equipment, buildings, or technology, the tax code lets them “depreciate” the cost — basically deducting a portion each year as the asset wears out. But under current law, companies can write off 100% of the cost of qualifying assets in year one (called “bonus depreciation” under Section 168(k)). So a company that spends $10 billion on data centers can deduct all $10 billion immediately, creating a massive paper loss even though the business is wildly profitable. Small businesses get a similar benefit through Section 179, though with a $1.25 million cap. At scale, bonus depreciation mainly benefits companies with enormous capital spending.
Tax Credits for Doing Business
Companies get credits for things like research & development, building in certain areas, renewable energy investments, and hiring specific types of workers. These are dollar-for-dollar reductions, same as the credits on your return — except corporations claim them at a scale that can zero out billions in tax liability. An individual might get a $2,000 Child Tax Credit. A tech giant gets a $500 million R&D credit. Both legal, wildly different impact.
Stock-Based Compensation Deductions
When a company pays employees with stock options, it gets to deduct the value of that stock when employees exercise it — even though the company never spent cash. If a CEO exercises $50 million in options, the company deducts $50 million from its taxable income. The bigger the stock price grows, the bigger the deduction. Companies with soaring stock prices get an ever-growing tax break that costs them nothing out of pocket.
Shifting Profits Overseas
Multinational corporations can move intellectual property (patents, trademarks, licensing rights) to subsidiaries in low-tax countries. Then the US branch “pays” the foreign subsidiary for using that IP, moving profit out of the US and into a country with a 0–5% rate. The economic activity happened in America. The jobs are in America. But on paper, the profit is in Ireland or Bermuda. Congress has tried to crack down on this, but the structures keep evolving faster than the rules.
So is any of this illegal?
No. That's the uncomfortable part. Every strategy above is written into the tax code by Congress. These companies have armies of tax lawyers and lobbyists making sure it stays that way. Meanwhile, a teacher or nurse with a straightforward W-2 has almost zero wiggle room — what you earn is what gets taxed, and that's that. The system isn't broken by accident. It works exactly as designed — it's just not designed with regular people in mind.
How the Tax Prep Industry Takes Advantage
Filing your taxes shouldn't cost money. Here's why it does — and how commercial software profits from your confusion.
The 'Free' Bait-and-Switch
Many paid tax platforms heavily advertise free filing, but the moment you enter common situations — a student loan, a side gig, investment income — they hit you with an upgrade screen. The 'free' version is designed to cover almost nobody's real-life situation. By the time you've spent 30 minutes entering data, you feel locked in and pay up.
Fear-Based Upselling
Paid platforms constantly interrupt your filing with pop-ups: "Are you sure you don't want audit protection?" or "Upgrade to get maximum deductions!" These create anxiety that you're missing something — when in reality, the standard process already finds every deduction you enter. They profit from your uncertainty.
Harvesting Your Financial Data
When you file through paid software, you hand over the most intimate snapshot of your financial life — income, debts, dependents, investments, address. Some companies use this data for targeted advertising, sell anonymized versions to data brokers, or push their own financial products (loans, credit cards, banking) directly in the filing flow.
Lobbying Against Free Filing
For years, major tax prep companies spent millions lobbying Congress to prevent the IRS from building its own free filing tool. They signed agreements with the IRS that effectively kept a free government option from being widely available — protecting their business model at taxpayers' expense. The IRS Direct File program is finally changing this.
Refund Advance Loans
Some platforms offer "refund advances" — essentially short-term loans against your expected refund. These are marketed as free money, but they typically require you to upgrade to a paid tier to qualify. Others carry processing fees that aren't prominently disclosed, and if the IRS adjusts your refund downward, you may owe the difference. It's your money — the IRS would have sent it in a few weeks anyway.
Complexity as a Business Model
The tax prep industry benefits from taxes feeling complicated. The more confusing it seems, the more people feel they need to pay someone to help. But the truth is: for the vast majority of Americans (W-2 employees, standard deduction, maybe some basic credits), federal taxes are straightforward. The IRS already has most of your information — you're mostly confirming it.
You Have Free Options
The IRS offers multiple ways to file your federal return at no cost. You don't need paid software.
IRS Direct File
File directly with the IRS for free — no middleman, no company handling your data.
VisitFree File Fillable Forms
Electronic IRS forms you fill out yourself — any income level, zero cost.
VisitVITA / TCE
Free in-person tax help from IRS-certified volunteers at locations across the country.
VisitDisclaimer: This is a calculation tool, not official tax advice. Verify all calculations with the IRS. You file your return yourself via free IRS options. FileTaxesForFree is not affiliated with the IRS.