Taxable Income

• Only part of your earnings is subject to federal income tax. For example, Fairmark.com points out that the personal exemption for 2011 is $3,700 and if you file as "single," you could take a standard deduction of $5,800. If deductible items like contributions to an IRA and to charities exceed the standard deduction, you can file an itemized tax return. What's left after you take all allowed deductions is your taxable income.
  
  

Federal Income Tax

• Your taxable income is subject to progressively higher percentages as it increases. Each percentage is applied to an income range called a tax bracket. The exact dollar amounts for each tax bracket vary according to your filing status. For instance, the lowest income tax percentage bracket is 10 percent and applies to your taxable income from $0 to $8,500 if you file as single. If you are married and file jointly, your 10 percent bracket starts at $0 taxable income and goes up to $17,000. As your income exceeds each tax bracket, the excess income is taxed at the next higher rate. The percentages for tax brackets rise from 10 percent to 15, 25 and 28 percent, respectively. If you earn enough, some of your income will be taxed at 33 percent and then at the highest rate of 35 percent. The maximum income tax percentage that applies to you is called your marginal tax rate.
  
  

Social Security

• There are two Social Security taxes: the retirement tax and Medicare tax. These are single rate taxes and apply to all of your income before any deductions or personal exemptions are subtracted. The Medicare tax is 1.45 percent if you work for an employer, who matches this amount. Normally, Social Security retirement tax is 6.2 percent, also matched by your employer. However, in 2011 this is lowered to 4.2 percent (employer contributions remained at 6.2 percent). Medicare tax is levied on all earned income. Social Security retirement tax is levied only up to a yearly threshold that is adjusted annually. For instance, in 2011 the threshold is $106,800. Income in excess of the threshold is not subject to Social Security retirement tax.
  
  

Capital Gains

• The percentage of federal tax for long-term capital gains is lower than for ordinary income. A capital gain is profit from an investment such as stocks, bonds or real estate. Dividends or interest are considered earnings and taxed as ordinary income, not capital gains. A long-term capital gain is profit from an investment held more than one full year. The tax percentage levied on long-term capital gains is 15 percent if your marginal tax rate is 25 percent or more. If your marginal tax rate is less than 25 percent, the long-term capital gains rate is zero.