The U.S. Constitution authorizes the federal government to collect various types of taxes from you.
NEW TAX LAW CHANGES
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
In the U.S. Constitution
The U.S. Constitution authorizes the federal government to collect various types of taxes from you. No one enjoys paying taxes, but without them, the government could not afford to provide you with the benefits and services it offers. Each form of taxation is governed by separate and distinct bodies of law; however, they all generally charge you tax when you either receive or give money or property.
Income tax
The most common form of federal taxation is the income tax. The income tax rules allow the government to collect taxes from any person or business that earns money during the year. The tax rules provide a broad and sweeping definition of taxable income to include all property you receive, regardless of whether you earn it at work, through a business or from making good investments. Although this can seem overwhelming, the rules also provide a wide range of credits, deductions and exclusions that reduce the amount of tax you must pay.
Gift tax
Although not as common as the income tax, the federal government does impose a tax when you make certain gifts to another person or entity. Gifts generally cover situations where you do not expect anything in exchange, such as when you give your children birthday gifts. But rest assured the government is not looking to tax those small gifts you make for birthdays, weddings and other special occasions. The tax only applies to large or high-value gifts you make.
Similar to the income tax, the rules governing these transfers allow you to reduce or eliminate the possibility of paying tax with credits, exclusions and deductions. For example, the annual gift exclusion allows you to make an unlimited number of gifts if the value per recipient is below a certain value. A unified credit is also available to every taxpayer. Essentially, this credit lets you make additional tax-free gifts when you use up an annual exclusion, but you do have to file a gift tax return.
Estate tax
The federal estate tax applies to gifts you make at death, rather than while you are alive. This covers the money and property you leave to your heirs in a will, trust or through some other method. Only the value of your estate that exceeds the exemption amount for the year of your death is subject to taxation. Although there is some overlap between the gift and estate tax, the exemption works in the same way as for gift tax but has historically been larger than $1 million.
Employment taxes
Revenue that the federal government raises through the imposition of employment taxes provides the necessary funds to operate social welfare programs such as Medicare and Social Security. If you are an employee, you will see these taxes deducted from your paycheck in addition to your federal income tax withholding.
As of 2025, you are responsible for paying 6.2 percent of your first $176,100 of earnings to fund Social Security, and 1.45 percent on all earnings to fund Medicare. Your employer is also responsible for paying an equal amount on your behalf, but this does not come out of your earnings. For 2024, the threshold was $168,600.
Under the One Big Beautiful Bill Act (OBBBA), the SALT deduction cap rises from $10,000 to $40,000 for 2025 and $40,400 for tax year 2026. It increases by 1% annually through 2029 before reverting to $10,000 in 2030. This higher cap begins phasing out for taxpayers with Modified Adjusted Gross Income (MAGI) above $500,000 ($505,000 in 2026).
Eligible service workers can deduct up to $25,000 of qualified tip income. For overtime pay, single filers can deduct up to $12,500 and joint filers up to $25,000. Both deductions are available to standard and itemized deduction filers, running through 2028, and phase out for single filers earning over $150,000 ($300,000 for joint filers).
OBBBA permanently increases the federal lifetime estate and gift tax exemption to $15 million per individual and $30 million for married couples starting in tax year 2026. Transfers under these limits avoid federal gift and estate taxes entirely using the unified credit.
Many Inflation Reduction Act green energy credits are being phased out early under OBBBA. Clean vehicle credits were phased out in late 2025, and residential clean energy and home improvement credits terminated after December 31, 2025.
No. Major OBBBA provisions—such as the tip and overtime deductions, the expanded Child Tax Credit ($2,200), and the temporary senior deduction ($6,000)—are available above-the-line or as direct tax adjustments, meaning you can claim them even if you take the permanent standard deduction. However, claiming the higher SALT cap ($40,400) requires itemizing deductions.
Manoj Sharma is a Senior Writer on the banking team at Tax Assistant. He provides information on budgeting, bank accounts, the banking industry, and other related topics. Using original data and methodologies, he helps you identify the best financial institutions, accounts, and products tailored to your needs. Manoj holds a degree in Journalism and Political Science from Syracuse University.
