Income

• The amount you owe in federal income taxes is computed as a percentage of your income. This means that before you can determine your tax, you'll need to know just how much you earned in taxable income during the previous year. Federal law requires employers to provide all employees with tax documents listing both their taxable income and the amount of tax withheld. Most employees receive W-2 forms, which note their wages. Other income forms include 1099-INT forms for accounting for bank interest and 1099-DIV forms for stock dividend income. Tax return forms ask taxpayers to enter data from each of these forms to compute total income.
  
  

Tax Brackets

• The amount of tax that an individual owes depends on which tax bracket that taxpayer falls into. Tax brackets change from year to year and charge different percentages of income as tax. Higher-earning taxpayers generally pay a higher percentage while low-income taxpayers pay a lower percentage. One way to control the federal tax you owe is by deferring income and spreading it out over the course of many years to prevent a spike in income from placing you in a higher tax bracket.
  
  

Deductions

• Deductions figure prominently in computing federal taxes. The IRS allows taxpayers to deduct certain expenses from their taxable income. This reduces the taxpayer's taxable income, thereby reducing her tax liability. Common deductions include charitable donations, education loan interest payments, home mortgage interest payments, business expenses and some medical expenses. Taxpayers can itemize their deductions, which involves listing each deductible item, or take a standard deduction, which is a single amount that the IRS provides based on filing status (single, married, etc.). The IRS also places limits on deductions, and tax return instructions note the maximum amount that taxpayers may deduct in each category.
  
  

Credits

• Whereas deductions reduce a taxpayer's taxable income, tax credits are subtractions from the tax an individual owes. Tax credits reduce how much you owe directly. Federal tax credits include an adoption credit for taxpayers who adopt a child, dependent care credits for caregivers, housing credits for new home buyers and the earned income credit for workers who earned a small income during the previous year.