fbpx
Wikipedia

Income tax in the United States

May 16, 2023

The United States federal government and most state governments impose an income tax. They are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed (with some exceptions in the case of federal income taxation), but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.

The 2015 edition of Form 1040, the tax form used for personal federal income tax returns filed by U.S. residents

In the United States, the term "payroll tax" usually refers to FICA taxes that are paid to fund Social Security and Medicare, while "income tax" refers to taxes that are paid into state and federal general funds.

Most business expenses are deductible. Individuals may deduct certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits.

Capital gains are taxable, and capital losses reduce taxable income to the extent of gains (plus, in certain cases, $3,000 or $1,500 of ordinary income). Individuals currently pay a lower rate of tax on capital gains and certain corporate dividends.

Taxpayers generally must self assess income tax by filing tax returns. Advance payments of tax are required in the form of withholding tax or estimated tax payments. Taxes are determined separately by each jurisdiction imposing tax. Due dates and other administrative procedures vary by jurisdiction. April 15 following the tax year is the deadline for individuals to file tax returns for federal and many state and local returns. Tax as determined by the taxpayer may be adjusted by the taxing jurisdiction.

Basics

Sources of U.S. income tax laws

United States income tax law comes from a number of sources. These sources have been divided by one author into three tiers as follows:[1]

  • Tier 1
  • Tier 2
    • Agency interpretative regulations (executive authority, written by the Internal Revenue Service (IRS) and Department of the Treasury), including:
      • Final, Temporary and Proposed Regulations promulgated under IRC § 7805 or other specific statutory authority;
      • Treasury Notices and Announcements;
      • Executive agreements with other countries;
    • Public Administrative Rulings (IRS Revenue Rulings, which provide informal guidance on specific questions and are binding on all taxpayers)
  • Tier 3
    • Legislative History
    • Private Administrative Rulings (private parties may approach the IRS directly and ask for a Private Letter Ruling on a specific issue – these rulings are binding only on the requesting taxpayer).

Where conflicts exist between various sources of tax authority, an authority in Tier 1 outweighs an authority in Tier 2 or 3. Similarly, an authority in Tier 2 outweighs an authority in Tier 3.[2] Where conflicts exist between two authorities in the same tier, the "last-in-time rule" is applied. As the name implies, the "last-in-time rule" states that the authority that was issued later in time is controlling.[2]

Regulations and case law serve to interpret the statutes. Additionally, various sources of law attempt to do the same thing. Revenue Rulings, for example, serves as an interpretation of how the statutes apply to a very specific set of facts. Treaties serve in an international realm.

Basic concepts

A tax is imposed on net taxable income in the United States by the federal, most state, and some local governments.[3] Income tax is imposed on individuals, corporations, estates, and trusts.[4] The definition of net taxable income for most sub-federal jurisdictions mostly follows the federal definition.[5]

The rate of tax at the federal level is graduated; that is, the tax rates on higher amounts of income are higher than on lower amounts. Federal individual tax rates vary from 10% to 37%.[6] Some states and localities impose an income tax at a graduated rate, and some at a flat rate on all taxable income.[7]

Individuals are eligible for a reduced rate of federal income tax on capital gains and qualifying dividends. The tax rate and some deductions are different for individuals depending on filing status. Married individuals may compute tax as a couple or separately. Single individuals may be eligible for reduced tax rates if they are head of a household in which they live with a dependent.

Taxable income is defined in a comprehensive manner in the Internal Revenue Code and tax regulations issued by the Department of Treasury and the Internal Revenue Service.[8] Taxable income is gross income as adjusted minus deductions. Most states and localities follow these definitions at least in part,[5] though some make adjustments to determine income taxed in that jurisdiction. Taxable income for a company or business may not be the same as its book income.[9]

Gross income includes all income earned or received from whatever source. This includes salaries and wages, tips, pensions, fees earned for services, price of goods sold, other business income, gains on sale of other property, rents received, interest and dividends received, proceeds from selling crops, and many other types of income. Some income, such as municipal bond interest, is exempt from income tax.

 
Federal receipts by source as share of total receipts (1950–2014). Individual income taxes (purple), payroll taxes/FICA (azure), corporate income taxes (green), excise taxes (orange), estate and gift taxes (yellow), other receipts (blue).[10]

Adjustments (usually reductions) to gross income of individuals are made for contributions to many types of retirement or health savings plans, certain student loan interest, half of self-employment tax, and a few other items. The cost of goods sold in a business is a direct reduction of gross income.

Business deductions: Taxable income of all taxpayers is reduced by deductions for expenses related to their business. These include salaries, rent, and other business expenses paid or accrued, as well as allowances for depreciation. The deduction of expenses may result in a loss. Generally, such loss can reduce other taxable income, subject to some limits.

Personal deductions: The former deduction for personal exemptions was repealed for 2018 through 2025.

Standard deduction: Individuals get a deduction from taxable income for certain personal expenses. An individual may claim a standard deduction. For 2021, the basic standard deduction was $12,550 for single individuals or married persons filing separately, $25,100 for a joint return or surviving spouse, and $18,800 for a head of household.

Itemized deductions: Those who choose to claim actual itemized deductions may deduct the following, subject to many conditions and limitations:

  • Medical expenses in excess of 10% of adjusted gross income,[11]
  • Certain taxes limited to $10,000 or $5,000 in 2018 through 2025,
  • Home mortgage interest,
  • Contributions to charities,
  • Losses on nonbusiness property due to casualty, and
  • Deductions for expenses incurred in the production of income in excess of 2% of adjusted gross income.

Capital gains: Capital gains include gains on selling stocks and bonds, real estate, and other capital assets. The gain is the excess of the proceeds over the adjusted tax basis (cost less depreciation deductions allowed) of the property. This lower rate of tax also applies to qualified dividends from U.S. corporations and many foreign corporations. There are limits on how much net capital loss may reduce other taxable income.

 
Total U.S. tax revenue as a % of GDP and income tax revenue as a % of GDP, 1945–2011, from Office of Management and Budget historicals

Tax credits: All taxpayers are allowed a credit for foreign taxes and for a percentage of certain types of business expenses. Individuals are also allowed credits related to education expenses, retirement savings, and child care expenses. Each of the credits is subject to specific rules and limitations. Some credits are treated as refundable payments.

Alternative minimum tax: All taxpayers are also subject to the Alternative Minimum Tax if their income exceeds certain exclusion amounts. This tax applies only if it exceeds regular income tax and is reduced by some credits.

Additional Medicare tax: High-income earners may also have to pay an additional 0.9% tax on wages, compensation, and self-employment income.[12]

Net investment income tax: Net investment income is subject to an additional 3.8% tax for individuals with income in excess of certain thresholds.

Tax returns: U.S. corporations and most resident individuals must file income tax returns to self assess income tax if any tax is due or to claim a tax refund. Some taxpayers must file an income tax return because they satisfy one of the several other conditions.[13] Tax returns may be filed electronically. Generally, an individual's tax return covers the calendar year. Corporations may elect a different tax year. Most states and localities follow the federal tax year and require separate returns.

Tax payment: Taxpayers must pay income tax due without waiting for an assessment. Many taxpayers are subject to withholding taxes when they receive income. To the extent withholding taxes do not cover all taxes due, all taxpayers must make estimated tax payments or face penalties.

Tax penalties: Failing to make payments on time, or failing to file returns, can result in substantial penalties. Certain intentional failures may result in jail time.

Tax returns may be examined and adjusted by tax authorities. Taxpayers have rights to appeal any change to tax, and these rights vary by jurisdiction. Taxpayers may also go to court to contest tax changes. Tax authorities may not make changes after a certain period of time (generally three or four years from the tax return due date).

Federal income tax rates for individuals

 
As of 2010, 68.8% of federal individual tax receipts, including payroll taxes, were paid by the top 20% of taxpayers by income group, which earned 50% of all household income. The top 1%, which took home 19.3%, paid 24.2% whereas the bottom 20% paid 0.4% due to deductions and the earned income tax credit.[14][15]

Federal income brackets and tax rates for individuals are adjusted annually for inflation. The Internal Revenue Service (IRS) accounts for changes to the CPI[16] and publishes the new rates as "Tax Rate Schedules".

Marginal tax rates

 
Marginal and effective federal tax rates on Adjusted Gross Income (AGI) in the U.S. for 2018.
 
Share of US individual income taxes vs. share of Adjusted Gross Income (AGI): Half of taxpayers paid 97.7 percent of federal individual income taxes, per York (2023) using 2020 data from the US Internal Revenue Service (IRS). The effective tax rate on the 1 percent highest adjusted gross incomes (AGIs) was 26 percent, almost double (1.91 times) the average, while the effective tax rate for the bottom half was 3.1 percent, only 23 percent of the average. A different perspective using gross income rather than AGI appears in work by Leiserson and Yagan (2021) published by the Biden White House. Leiserson and Yagan estimated that the average federal effective individual income tax rate paid by America’s 400 wealthiest families was between 6 and 12 percent with the most likely number being 8.2 percent. The difference comes in the adjustments, while the uncertainty comes from unsold stock, which is taxed at a maximum of 20 percent when sold and never taxed if passed as inheritance. Erica York (January 26, 2023), Summary of the Latest Federal Income Tax Data, 2023 Update, Tax Foundation, Wikidata Q118189145 Greg Leiserson; Danny Yagan (September 23, 2021), What Is the Average Federal Individual Income Tax Rate on the Wealthiest Americans?, White House, Wikidata Q118192958

Beginning in 2013, an additional tax of 3.8% applies to net investment income in excess of certain thresholds.[20]

An individual pays tax at a given bracket only for each dollar within that tax bracket's range. The top marginal rate does not apply in certain years to certain types of income. Significantly lower rates apply after 2003 to capital gains and qualifying dividends (see below).

Example of a tax computation

Income tax for year 2017:

Single taxpayer making $40,000 gross income, no children, under 65 and not blind, taking standard deduction;

  • $40,000 gross income – $6,350 standard deduction – $4,050 personal exemption = $29,600 taxable income
    • amount in the first income bracket = $9,325; taxation of the amount in the first income bracket = $9,325 × 10% = $932.50
    • amount in the second income bracket = $29,600 – $9,325 = $20,275.00; taxation of the amount in the second income bracket = $20,275.00 × 15% = $3,041.25
  • Total income tax is $932.50 + $3,041.25 = $3,973.75 (~9.93% effective tax)

Note, however, that taxpayers with taxable income of less than $100,000 must use IRS provided tax tables. Under that table for 2016, the income tax in the above example would be $3,980.00.[32]

In addition to income tax, a wage earner would also have to pay Federal Insurance Contributions Act tax (FICA) (and an equal amount of FICA tax must be paid by the employer):

  • $40,000 (adjusted gross income)
    • $40,000 × 6.2%[33] = $2,480 (Social Security portion)
    • $40,000 × 1.45% = $580 (Medicare portion)
  • Total FICA tax paid by employee = $3,060 (7.65% of income)
  • Total federal tax of individual = $3,973.75 + $3,060.00 = $7,033.75 (~17.58% of income)

Total federal tax including employer's contribution:

  • Total FICA tax contributed by employer = $3,060 (7.65% of income)
  • Total federal tax of individual including employer's contribution = $3,973.75 + $3,060.00 + $3,060.00 = $10,093.75 (~25.23% of income)
Further information: Rate schedule (federal income tax)

Effective income tax rates

Effective tax rates are typically lower than marginal rates due to various deductions, with some people actually having a negative liability. The individual income tax rates in the following chart include capital gains taxes, which have different marginal rates than regular income.[15][34] Only the first $118,500 of someone's income is subject to social insurance (Social Security) taxes in 2016. The table below also does not reflect changes, effective with 2013 law, which increased the average tax paid by the top 1% to the highest levels since 1979, at an effective rate of 33%, while most other taxpayers have remained near the lowest levels since 1979.[35]

Effective federal tax rates and average incomes for 2010[15]
Quintile Average income before taxes Effective individual income tax rate Effective payroll tax rate Combined effective income and payroll tax rate Total effective federal tax rate (includes corporate income and excise taxes)
Lowest $24,100 −9.2% 8.4% −0.8% 1.5%
Second $44,200 −2.3% 7.8% 5.5% 7.2%
Middle $65,400 1.6% 8.3% 9.9% 11.5%
Fourth $95,500 5.0% 9.0% 14.0% 15.6%
Highest $239,100 13.8% 6.7% 20.5% 24.0%
81st to 90th percentiles $134,600 8.1% 9.4% 17.5% 19.3%
91st to 95th percentiles $181,600 10.7% 8.9% 19.6% 21.6%
96th to 99th percentiles $286,400 15.1% 7.1% 22.2% 24.9%
Top 1% $1,434,900 20.1% 2.2% 22.3% 29.4%

Taxable income

Income tax is imposed as a tax rate times taxable income. Taxable income is defined as gross income less allowable deductions. Taxable income as determined for federal tax purposes may be modified for state tax .

Gross income

Main article: Gross income

The Internal Revenue Code states that "gross income means all income from whatever source derived," and gives specific examples.[36] Gross income is not limited to cash received, but "includes income realized in any form, whether money, property, or services."[37] Gross income includes wages and tips, fees for performing services, gain from sale of inventory or other property, interest, dividends, rents, royalties, pensions, alimony, and many other types of income.[36] Items must be included in income when received or accrued. The amount included is the amount the taxpayer is entitled to receive. Gains on property are the gross proceeds less amounts returned, cost of goods sold, or tax basis of property sold.

Certain types of income are exempt from income tax. Among the more common types of exempt income are interest on municipal bonds, a portion of Social Security benefits, life insurance proceeds, gifts or inheritances, and the value of many employee benefits.

Gross income is reduced by adjustments and deductions. Among the more common adjustments are reductions for alimony paid and IRA and certain other retirement plan contributions. Adjusted gross income is used in calculations relating to various deductions, credits, phase outs, and penalties.

Business deductions

Main article: Tax deduction

Most business deductions are allowed regardless of the form in which the business is conducted.[38] Therefore, an individual small business owner is allowed most of the same business deductions as a publicly traded corporation. A business is an activity conducted regularly to make a profit. Only a few business-related deductions are unique to a particular form of business-doing. The deduction of investment expenses by individuals, however, has several limitations, along with other itemized (personal) deductions.[39]

The amount and timing of deductions for income tax purposes is determined under tax accounting rules, not financial accounting ones. Tax rules are based on principles similar in many ways to accounting rules, but there are significant differences. Federal deductions for most meals and entertainment costs are limited to 50% of the costs (with an exception for tax year 2021, allowing a 100% deduction for meals purchased in a restaurant). Costs of starting a business (sometimes called pre-operating costs) are deductible ratably over 60 months. Deductions for lobbying and political expenses are limited. Some other limitations apply.

Expenses likely to produce future benefits must be capitalized.[40] The capitalized costs are then deductible as depreciation (see MACRS) or amortization over the period future benefits are expected.[41] Examples include costs of machinery and equipment and costs of making or building property. IRS tables specify lives of assets by class of asset or industry in which used. When an asset the cost of which was capitalized is sold, exchanged, or abandoned, the proceeds (if any) are reduced by the remaining unrecovered cost to determine gain or loss. That gain or loss may be ordinary (as in the case of inventory) or capital (as in the case of stocks and bonds), or a combination (for some buildings and equipment).[42]

Most personal, living, and family expenses are not deductible. Business deductions allowed for federal income tax are almost always allowed in determining state income tax. Only some states, however, allow itemized deductions for individuals. Some states also limit deductions by corporations for investment related expenses. Many states allow different amounts for depreciation deductions. State limitations on deductions may differ significantly from federal limitations.

Business deductions in excess of business income result in losses that may offset other income. However, deductions for losses from passive activities may be deferred to the extent they exceed income from other passive activities.[43] Passive activities include most rental activities (except for real estate professionals) and business activities in which the taxpayer does not materially participate. In addition, losses may not, in most cases, be deducted in excess of the taxpayer's amount at risk (generally tax basis in the entity plus share of debt).

Personal deductions

Prior to 2018, individuals were allowed a special deduction called a personal exemption. This was not allowed after 2017 but will be allowed again in 2026. This was a fixed amount allowed each taxpayer, plus an additional fixed amount for each child or other dependents the taxpayer supports. The amount of this deduction was $4,000 for 2015. The amount is indexed annually for inflation. The amount of exemption was phased out at higher incomes through 2009 and after 2012 (no phase out in 2010–2012).[44]

Citizens and individuals with U.S. tax residence may deduct a flat amount as a standard deduction. This was $12,550 for single individuals and $25,100 for married individuals filing a joint return for 2021. Alternatively, individuals may claim itemized deductions for actual amounts incurred for specific categories of nonbusiness expenses.[45] Expenses incurred to produce tax exempt income and several other items are not deductible.[46] Home owners may deduct the amount of interest and property taxes paid on their principal and second homes. Local and state income taxes are deductible through the SALT deduction although this deduction is currently limited to $10,000.[47] Contributions to charitable organizations are deductible by individuals and corporations, but the deduction is limited to 50% and 10% of gross income, respectively. Medical expenses in excess of 10% of adjusted gross income are deductible, as are uninsured casualty losses. Other income producing expenses in excess of 2% of adjusted gross income are also deductible. Before 2010, the allowance of itemized deductions was phased out at higher incomes. The phase out expired for 2010.[48]

Retirement savings and fringe benefit plans

Employers get a deduction for amounts contributed to a qualified employee retirement plan or benefit plan. The employee does not recognize income with respect to the plan until he or she receives a distribution from the plan. The plan itself is organized as a trust and is considered a separate entity. For the plan to qualify for tax exemption, and for the employer to get a deduction, the plan must meet minimum participation, vesting, funding, and operational standards.

Examples of qualified plans include:

Employees or former employees are generally taxed on distributions from retirement or stock plans. Employees are not taxed on distributions from health insurance plans to pay for medical expenses. Cafeteria plans allow employees to choose among benefits (like choosing food in a cafeteria), and distributions to pay those expenses are not taxable.

In addition, individuals may make contributions to Individual Retirement Accounts (IRAs). Those not currently covered by other retirement plans may claim a deduction for contributions to certain types of IRAs. Income earned within an IRA is not taxed until the individual withdraws it.

Capital gains

Main article: Capital gains tax in the United States

Taxable income includes capital gains. However, individuals are taxed at a lower rate on long term capital gains and qualified dividends (see below). A capital gain is the excess of the sales price over the tax basis (usually, the cost) of capital assets, generally those assets not held for sale to customers in the ordinary course of business. Capital losses (where basis is more than sales price) are deductible, but deduction for long term capital losses is limited to the total capital gains for the year, plus for individuals up to $3,000 of ordinary income ($1,500 if married filing separately). An individual may exclude $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of the individual's primary residence, subject to certain conditions and limitations.[49] Gains on depreciable property used in a business are treated as ordinary income to the extent of depreciation previously claimed.[50]

In determining gain, it is necessary to determine which property is sold and the amount of basis of that property. This may require identification conventions, such as first-in-first-out, for identical properties like shares of stock. Further, tax basis must be allocated among properties purchased together unless they are sold together. Original basis, usually cost paid for the asset, is reduced by deductions for depreciation or loss.

Certain capital gains are deferred; that is, they are taxed at a time later than the year of disposition. Gains on property sold for installment payments may be recognized as those payments are received. Gains on real property exchanged for like-kind property are not recognized, and the tax basis of the new property is based on the tax basis of the old property.

Before 1986 and from 2004 onward, individuals were subject to a reduced rate of federal tax on capital gains (called long-term capital gains) on certain property held more than 12 months. The reduced rate of 15% applied for regular tax and the Alternative Minimum Tax through 2011. The reduced rate also applies to dividends from corporations organized in the United States or a country with which the United States has an income tax treaty. This 15% rate was increased to 20% in 2012. Beginning in 2013, capital gains above certain thresholds is included in net investment income subject to an additional 3.8% tax.[51]

Ordinary income rate Long-term capital gain rate* Short-term capital gain rate Recapture of depreciation on long-term gain of real estate Long-term gain on collectibles Long-term gain on certain small business stock
10% 0% 10% 10% 10% 10%
15% 0% 15% 15% 15% 15%
25% 15% 25% 25% 25% 25%
28% 15% 28% 25% 28% 28%
33% 15% 33% 25% 28% 28%
35% 20% 35% 25% 28% 28%
37% 20% 37% 25% 28% 28%
* Capital gains up to $250,000 ($500,000 if filed jointly) on real estate used as primary residence are exempt

Accounting periods and methods

The US tax system allows individuals and entities to choose their tax year. Most individuals choose the calendar year. There are restrictions on choice of tax year for some closely held entities. Taxpayers may change their tax year in certain circumstances, and such change may require IRS approval.

Taxpayers must determine their taxable income based on their method of accounting for the particular activity. Most individuals use the cash method for all activities. Under this method, income is recognized when received and deductions taken when paid. Taxpayers may choose or be required to use the accrual method for some activities. Under this method, income is recognized when the right to receive it arises, and deductions are taken when the liability to pay arises and the amount can be reasonably determined. Taxpayers recognizing cost of goods sold on inventory must use the accrual method with respect to sales and costs of the inventory.

Methods of accounting may differ for financial reporting and tax purposes. Specific methods are specified for certain types of income or expenses. Gain on sale of property other than inventory may be recognized at the time of sale or over the period in which installment sale payments are received. Income from long-term contracts must be recognized ratably over the term of the contract, not just at completion. Other special rules also apply.[52]

Other taxable and tax exempt entities

Partnerships and LLCs

Business entities treated as partnerships are not subject to income tax at the entity level. Instead, their members include their share of income, deductions, and credits in computing their own tax.[53] The character of the partner's share of income (such as capital gains) is determined at the partnership level. Many types of business entities, including limited liability companies (LLCs), may elect to be treated as a corporation or as a partnership. Distributions from partnerships are not taxed as dividends.

Corporations

Main article: Corporate tax in the United States
 
The U.S. federal effective corporate tax rate has become much lower than the nominal rate because of various special tax provisions.

Corporate tax is imposed in the U.S. at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations.[54] A corporation wholly owned by U.S. citizens and resident individuals may elect for the corporation to be taxed similarly to partnerships as an S Corporation. Corporate income tax is based on taxable income, which is defined similarly to individual taxable income.

Shareholders (including other corporations) of corporations (other than S Corporations) are taxed on dividend distributions from the corporation. They are also subject to tax on capital gains upon sale or exchange of their shares for money or property. However, certain exchanges, such as in reorganizations, are not taxable.

Multiple corporations may file a consolidated return at the federal and some state levels with their common parent.

Corporate tax rates

Federal corporate income tax is imposed at 21% from 2018. Dividend exclusions and certain corporation-only deductions may significantly lower the effective rate.

Deductions for corporations

Most expenses of corporations are deductible, subject to limitations also applicable to other taxpayers. (See relevant deductions for details.) In addition, regular U.S. corporations are allowed a deduction of 100% of dividends received from 10% or more foreign subsidiaries, 50% of amounts included in income under section 951A, and 37.5% of foreign branch income.

Some deductions of corporations are limited at federal or state levels. Limitations apply to items due to related parties, including interest and royalty expenses.

Estates and trusts

Estates and trusts may be subject to income tax at the estate or trust level, or the beneficiaries may be subject to income tax on their share of income. Where income must be distributed, the beneficiaries are taxed similarly to partners in a partnership. Where income may be retained, the estate or trust is taxed. It may get a deduction for later distributions of income. Estates and trusts are allowed only those deductions related to producing income, plus $1,000. They are taxed at graduated rates that increase rapidly to the maximum rate for individuals. The tax rate for trust and estate income in excess of $11,500 was 35% for 2009. Estates and trusts are eligible for the reduced rate of tax on dividends and capital gains through 2011.

Tax-exempt entities

Main article: Tax exemption

U.S. tax law exempts certain types of entities from income and some other taxes. These provisions arose during the late 19th century. Charitable organizations and cooperatives may apply to the IRS for tax exemption. Exempt organizations are still taxed on any business income. An organization which participates in lobbying, political campaigning, or certain other activities may lose its exempt status. Special taxes apply to prohibited transactions and activities of tax-exempt entities.

Social insurance taxes (Social Security tax and Medicare tax, or FICA)

Main article: Federal Insurance Contributions Act tax

The United States social insurance system is funded by a tax similar to an income tax. Social Security tax of 6.2% is imposed on wages paid to employees. The tax is imposed on both the employer and the employee. The maximum amount of wages subject to the tax for 2020 was $137,700.[55] This amount is indexed for inflation. A companion Medicare Tax of 1.45% of wages is imposed on employers and employees with no limitation. A self-employment tax composed of both the employer and employee amounts (totaling 15.3%) is imposed on self-employed persons.

Other tax items

Credits

Main article: Tax credits

The federal and state systems offer numerous tax credits for individuals and businesses. Among the key federal credits for individuals are:

  • Child credit: For 2017, a credit up to $1,000 per qualifying child. For 2018 to 2025, the credit rose to $2,000 per qualifying child but made having a Social Security Number (SSN) a condition of eligibility for each child. For 2021, the credit was temporarily raised to $3,000 per child aged 6 to 17 and $3,600 per qualifying child aged 0 to 5 and was made fully refundable.
  • Child and dependent care credit: a credit up to $6,000, phased out at incomes above $15,000. For 2021, the credit was raised up to $16,000, phased out at $125,000.[56]
  • Earned Income Tax Credit: this refundable credit is granted for a percentage of income earned by a low income individual. The credit is calculated and capped based on the number of qualifying children, if any. This credit is indexed for inflation and phased out for incomes above a certain amount. For 2015, the maximum credit was $6,422.[57]
  • Credit for the elderly and disabled: A nonrefundable credit up to $1,125.
  • Two mutually exclusive credits for college expenses.

Businesses are also eligible for several credits. These credits are available to individuals and corporations and can be taken by partners in business partnerships. Among the federal credits included in a "general business credit" are:

In addition, a federal foreign tax credit is allowed for foreign income taxes paid. This credit is limited to the portion of federal income tax arising due to foreign source income. The credit is available to all taxpayers.

Business credits and the foreign tax credit may be offset taxes in other years.

States and some localities offer a variety of credits that vary by jurisdiction. States typically grant a credit to resident individuals for income taxes paid to other states, generally limited in proportion to income taxed in the other state(s).

Alternative minimum tax

Main article: Alternative Minimum Tax

Taxpayers must pay the higher of the regular income tax or the alternative minimum tax (AMT). Taxpayers who have paid AMT in prior years may claim a credit against regular tax for the prior AMT. The credit is limited so that regular tax is not reduced below current year AMT.

AMT is imposed at a nearly flat rate (20% for corporations, 26% or 28% for individuals, estates, and trusts) on taxable income as modified for AMT. Key differences between regular taxable income and AMT taxable income include:

  • The standard deduction and personal exemptions are replaced by a single deduction, which is phased out at higher income levels,
  • No deduction is allowed for individuals for state taxes,
  • Most miscellaneous itemized deductions are not allowed for individuals,
  • Depreciation deductions are computed differently, and
  • Corporations must make a complex adjustment to more closely reflect economic income.

Special taxes

There are many federal tax rules designed to prevent people from abusing the tax system. Provisions related to these taxes are often complex. Such rules include:

Special industries

Tax rules recognize that some types of businesses do not earn income in the traditional manner and thus require special provisions. For example, insurance companies must ultimately pay claims to some policy holders from the amounts received as premiums. These claims may happen years after the premium payment. Computing the future amount of claims requires actuarial estimates until claims are actually paid. Thus, recognizing premium income as received and claims expenses as paid would seriously distort an insurance company's income.

Special rules apply to some or all items in the following industries:

  • Insurance companies (rules related to recognition of income and expense; different rules apply to life insurance and to property and casualty insurance)
  • Shipping (rules related to the revenue recognition cycle)
  • Extractive industries (rules related to expenses for exploration and development and for recovery of capitalized costs)

In addition, mutual funds (regulated investment companies) are subject to special rules allowing them to be taxed only at the owner level. The company must report to each owner his/her share of ordinary income, capital gains, and creditable foreign taxes. The owners then include these items in their own tax calculation. The fund itself is not taxed, and distributions are treated as a return of capital to the owners. Similar rules apply to real estate investment trusts and real estate mortgage investment conduits.

State, local and territorial income taxes

Main article: State income tax
 
Top Marginal State Income Tax Withholding Rates 2022

Income tax is also levied by most U.S. states and many localities on individuals, corporations, estates, and trusts. These taxes are in addition to federal income tax and are deductible for federal tax purposes. State and local income tax rates vary from zero to 16% of taxable income.[58] Some state and local income tax rates are flat (single rate), and some are graduated. State and local definitions of what income is taxable vary highly. Some states incorporate the federal definitions by reference. Taxable income is defined separately and differently for individuals and corporations in some jurisdictions. Some states impose alternative or additional taxes based on a second measure of income or capital.

States and localities tend to tax all income of residents. States and localities only tax nonresidents on income allocated or apportioned to the jurisdiction. Generally, nonresident individuals are taxed on wages earned in the state based on the portion of days worked in the state. Many states require partnerships to pay tax for nonresident partners.

Tax returns are filed separately for states and localities imposing income tax, and may be due on dates that differ from federal due dates. Some states permit related corporations to file combined or consolidated returns. Most states and localities imposing income tax require estimated payments where tax exceeds certain thresholds and require withholding tax on payment of wages.

Puerto Rico also imposes its own taxation laws; however, unlike in the states, only some residents there pay federal income taxes[59] (though everyone must pay all other federal taxes).[Note 1] The other unincorporated territories of Guam, American Samoa, the Northern Mariana Islands and the Virgin Islands also impose their own income taxation laws, under a "mirror" tax law based on federal income tax law.

International aspects

See also: International tax, Foreign tax credit, Foreign earned income exclusion, and Foreign Account Tax Compliance Act

The United States imposes tax on all citizens of the United States, including those who are residents of other countries, all individuals who are residents for tax purposes, and domestic corporations, defined as corporations created or organized in the United States or under Federal or state law.

Federal income tax is imposed on citizens, residents, and domestic corporations based on their worldwide income. To mitigate double taxation, a credit is allowed for foreign income taxes. This foreign tax credit is limited to that part of current year tax attributable to foreign source income. Determining such part involves determining the source of income and allocating and apportioning deductions to that income. Many, but not all, tax resident individuals and corporations on their worldwide income, but few allow a credit for foreign taxes.

In addition, federal income tax may be imposed on non-resident non-citizens as well as foreign corporations on U.S. source income. Federal tax applies to interest, dividends, royalties, and certain other income of nonresident aliens and foreign corporations not effectively connected with a U.S. trade or business at a flat rate of 30%.[60] This rate is often reduced under tax treaties. Foreign persons are taxed on income effectively connected with a U.S. business and gains on U.S. realty similarly to U.S. persons.[61] Nonresident aliens who are present in the United States for a period of 183 days in a given year are subject to U.S. capital gains tax on certain net capital gains realized during that year from sources within the United States. The states tax non-resident individuals only on income earned within the state (wages, etc.), and tax individuals and corporations on business income apportioned to the state.

The United States has income tax treaties with over 65 countries. These treaties reduce the chance of double taxation by allowing each country to fully tax its citizens and residents and reducing the amount the other country can tax them. Generally the treaties provide for reduced rates of tax on investment income and limits as to which business income can be taxed. The treaties each define which taxpayers can benefit from the treaty. U.S. treaties do not apply to income taxes imposed by the states or political subdivisions, except for the non discrimination provisions that appear in almost every treaty. Also, U.S. treaties generally do not permit U.S. persons from invoking treaty provisions with respect to U.S. taxes, with certain relatively standard exceptions.

Tax collection and examinations

Tax returns

Individuals (with income above a minimum level), corporations, partnerships, estates, and trusts must file annual reports, called tax returns, with federal[62] and appropriate state tax authorities. These returns vary greatly in complexity level depending on the type of filer and complexity of their affairs. On the return, the taxpayer reports income and deductions, calculates the amount of tax owed, reports payments and credits, and calculates the balance due.

Federal individual, estate, and trust income tax returns are due by April 15[63] for most taxpayers. Corporate and partnership federal returns are due two and one half months following the corporation's year end. Tax exempt entity returns are due four and one half months following the entity's year end. All federal returns may be extended with most extensions available by merely filing a single page form. Due dates and extension provisions for state and local income tax returns vary.

Income tax returns generally consist of the basic form with attached forms and schedules. Several forms are available for individuals and corporations, depending on the complexity and nature of the taxpayer's affairs. Many individuals are able to use the one page Form 1040-EZ, which requires no attachments except wage statements from employers (Forms W-2). Individuals claiming itemized deductions must complete Schedule A. Similar schedules apply for interest (Schedule B), dividends (Schedule B), business income (Schedule C), capital gains (Schedule D), farm income (Schedule F), and self-employment tax (Schedule-SE). All taxpayers must file those forms for credits, depreciation, AMT, and other items that apply to them.

Electronic filing of tax returns may be done for taxpayers by registered tax preparers.

If a taxpayer discovers an error on a return, or determines that tax for a year should be different, the taxpayer should file an amended return. These returns constitute claims for refund if taxes are determined to have been overpaid.

 
People filing tax forms in 1920.

The IRS, state, and local tax authorities may examine a tax return and propose changes. Changes to tax returns may be made with minimal advance involvement by taxpayers, such as changes to wage or dividend income to correct errors. Other examination of returns may require extensive taxpayer involvement, such as an audit by the IRS. These audits often require that taxpayers provide the IRS or other tax authority access to records of income and deductions. Audits of businesses are usually conducted by IRS personnel at the business location.

Changes to returns are subject to appeal by the taxpayer, including going to court. IRS changes are often first issued as proposed adjustments. The taxpayer may agree to the proposal or may advise the IRS why it disagrees. Proposed adjustments are often resolved by the IRS and taxpayer agreeing to what the adjustment should be. For those adjustments to which agreement is not reached, the IRS issues a 30-day letter advising of the adjustment. The taxpayer may appeal this preliminary assessment within 30 days within the IRS.

The Appeals Division reviews the IRS field team determination and taxpayer arguments, and often proposes a solution that the IRS team and the taxpayer find acceptable. When an agreement is still not reached, the IRS issues an assessment as a notice of deficiency or 90-day letter. The taxpayer then has three choices: file suit in United States Tax Court without paying the tax, pay the tax and sue for refund in regular court, or simply pay the tax and be done. Recourse to court can be costly and time-consuming but is often successful.

IRS computers routinely make adjustments to correct mechanical errors in returns. In addition, the IRS conducts an extensive document matching computer program that compares taxpayer amounts of wages, interest, dividends, and other items to amounts reported by taxpayers. These programs automatically issue 30-day letters advising of proposed changes. Only a very small percentage of tax returns are actually examined. These are selected by a combination of computer analysis of return information and random sampling. The IRS has long maintained a program to identify patterns on returns most likely to require adjustment.

Procedures for examination by state and local authorities vary by jurisdiction.

Tax collection

Taxpayers are required to pay all taxes owed based on the self-assessed tax returns, as adjusted. The IRS collection process may provide time payment plans that include interest and a "penalty" that is merely added interest. Where taxpayers do not pay tax owed, the IRS has strong means to enforce collection. These include the ability to levy bank accounts and seize property. Generally, significant advance notice is given before levy or seizure. However, in certain rarely used jeopardy assessments the IRS may immediately seize money and property. The IRS Collection Divisions are responsible for most collection activities.

Withholding of tax

Main article: Tax withholding in the United States

Persons paying wages or making certain payments to foreign persons are required to withhold income tax from such payments. Income tax withholding on wages is based on declarations by employees and tables provided by the IRS. Persons paying interest, dividends, royalties, and certain other amounts to foreign persons must also withhold income tax at a flat rate of 30%. This rate may be reduced by a tax treaty. These withholding requirements also apply to non-U.S. financial institutions. Additional backup withholding provisions apply to some payments of interest or dividends to U.S. persons. The amount of income tax withheld is treated as a payment of tax by the person receiving the payment on which tax was withheld.

Employers and employees must also pay Social Security tax, the employee portion of which is also to be withheld from wages. Withholding of income and Social Security taxes are often referred to as payroll tax.

Statute of limitations

The IRS is precluded from assessing additional tax after a certain period of time. In the case of federal income tax, this period is generally three years from the later of the due date of the original tax return or the date the original return was filed. The IRS has an additional three more years to make changes if the taxpayer has substantially understated gross income. The period under which the IRS may make changes is unlimited in the case of fraud, or in the case of failure to file a return.[64]

Penalties

Main article: IRS penalties

Taxpayers who fail to file returns, file late, or file returns that are wrong, may be subject to penalties. These penalties vary based on the type of failure. Some penalties are computed as interest, some are fixed amounts, and some are based on other measures. Penalties for filing or paying late are generally based on the amount of tax that should have been paid and the degree of lateness. Penalties for failures related to certain forms are fixed amounts, and vary by form from very small to huge.

Intentional failures, including tax fraud, may result in criminal penalties. These penalties may include jail time or forfeiture of property. Criminal penalties are assessed in coordination with the United States Department of Justice.

History

Constitutional

Main article: United States income tax (legal history)
See also: Taxation history of the United States and Marginal tax rates in the United States (history)
 
President Abraham Lincoln and the United States Congress introduced in 1861 the first personal income tax in the United States.

Article I, Section 8, Clause 1 of the United States Constitution (the "Taxing and Spending Clause"), specifies Congress's power to impose "Taxes, Duties, Imposts and Excises", but Article I, Section 8 requires that, "Duties, Imposts and Excises shall be uniform throughout the United States."[65]

The Constitution specifically stated Congress' method of imposing direct taxes, by requiring Congress to distribute direct taxes in proportion to each state's population "determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons". It had been argued that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the federal government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."

Taxation was also the subject of Federalist No. 33 penned secretly by the Federalist Alexander Hamilton under the pseudonym Publius. In it, he asserts that the wording of the "Necessary and Proper" clause should serve as guidelines for the legislation of laws regarding taxation. The legislative branch is to be the judge, but any abuse of those powers of judging can be overturned by the people, whether as states or as a larger group.

The courts have generally held that direct taxes are limited to taxes on people (variously called "capitation", "poll tax" or "head tax") and property.[66] All other taxes are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se.[67] What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.

Early federal income taxes

The first income tax suggested in the United States was during the War of 1812. The idea for the tax was based on the British Tax Act of 1798. The British tax law applied progressive rates to income. The British tax rates ranged from 0.833% on income starting at £60 to 10% on income above £200. The tax proposal was developed in 1814. Because the Treaty of Ghent was signed in 1815, ending hostilities and the need for additional revenue, the tax was never imposed in the United States.[68]

In order to help pay for its war effort in the American Civil War, Congress imposed the first federal income tax in U.S. history through passage of the Revenue Act of 1861.[69] The act created a flat tax of three percent on incomes above $800 (which was 5.6 times the 1861 nominal gross domestic product per capita of $144.31; the corresponding income in 2021 is $384K). This taxation of income reflected the increasing amount of wealth held in stocks and bonds rather than property, which the federal government had taxed in the past.[70] The Revenue Act of 1862 established the first national inheritance tax and added a progressive taxation structure to the federal income tax, implementing a tax of five percent on incomes above $10,000.[71] Congress later further raised taxes, and by the end of the war, the income tax constituted about one-fifth of the revenue of the federal government. To collect these taxes, Congress created the Office of the Commissioner of Internal Revenue within the Treasury Department.[72] The federal income tax would remain in effect until its repeal in 1872.[73]

In 1894, Democrats in Congress passed the Wilson-Gorman tariff, which imposed the first peacetime income tax. The rate was 2% on income over $4,000, which meant fewer than 10% of households would pay any. The purpose of the income tax was to make up for revenue that would be lost by tariff reductions.[74] In 1895 the United States Supreme Court, in its ruling in Pollock v. Farmers' Loan & Trust Co., held a tax based on receipts from the use of property to be unconstitutional. The Court held that taxes on rents from real estate, on interest income from personal property, and other income from personal property (which includes dividend income) were treated as direct taxes on property, and therefore had to be apportioned (divided among the states based on their populations). Since apportionment of income taxes is impractical, this had the effect of prohibiting a federal tax on income from property. However, the Court affirmed that the Constitution did not deny Congress the power to impose a tax on real and personal property, and it affirmed that such would be a direct tax.[75] Due to the political difficulties of taxing individual wages without taxing income from property, a federal income tax was impractical from the time of the Pollock decision until the time of ratification of the Sixteenth Amendment (below).

Progressive Era

For several years, the issue of an income tax lay unaddressed. In 1906, President Theodore Roosevelt revived the idea in his Sixth Annual Message to Congress.[76][77][78] He said:

There is every reason why, when next our system of taxation is revised, the National Government should impose a graduated inheritance tax, and, if possible, a graduated income tax.

During the speech he cited the Pollock case without naming it specifically.[79][76] The income tax became an issue again in Roosevelt's later speeches, including the 1907 State of the Union[80] and during the 1912 election campaign.[81]

Roosevelt's successor, William Howard Taft, also took up the issue of the income tax. Like Roosevelt, Taft cited the Pollock decision[82] and gave a major speech in June 1909 regarding the Income Tax.[83] One month later, Congress passed the resolution that would become the 16th Amendment.[84]

Ratification of the Sixteenth Amendment

Main article: Sixteenth Amendment to the United States Constitution
 
Amendment XVI in the National Archives

In response,[83] Congress proposed the Sixteenth Amendment (ratified by the requisite number of states in 1913),[85] which states:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The Supreme Court in Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916), indicated that the amendment did not expand the federal government's existing power to tax income (meaning profit or gain from any source) but rather removed the possibility of classifying an income tax as a direct tax on the basis of the source of the income. The Amendment removed the need for the income tax to be apportioned among the states on the basis of population. Income taxes are required, however, to abide by the law of geographical uniformity.

Some tax protesters and others opposed to income taxes cite what they contend is evidence that the Sixteenth Amendment was never properly ratified, based in large part on materials sold by William J. Benson. In December 2007, Benson's "Defense Reliance Package" containing his non-ratification argument which he offered for sale on the Internet, was ruled by a federal court to be a "fraud perpetrated by Benson" that had "caused needless confusion and a waste of the customers' and the IRS' time and resources".[86] The court stated: "Benson has failed to point to evidence that would create a genuinely disputed fact regarding whether the Sixteenth Amendment was properly ratified or whether United States Citizens are legally obligated to pay federal taxes."[87] See also Tax protester Sixteenth Amendment arguments.

Modern interpretation of the power to tax incomes

The modern interpretation of the Sixteenth Amendment taxation power can be found in Commissioner v. Glenshaw Glass Co. 348 U.S. 426 (1955). In that case, a taxpayer had received an award of punitive damages from a competitor for antitrust violations and sought to avoid paying taxes on that award. The Court observed that Congress, in imposing the income tax, had defined gross income, under the Internal Revenue Code of 1939, to include:

gains, profits, and income derived from salaries, wages or compensation for personal service ... of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.[88]: p. 429 

(Note: The Glenshaw Glass case was an interpretation of the definition of "gross income" in section 22 of the Internal Revenue Code of 1939. The successor to section 22 of the 1939 Code is section 61 of the current Internal Revenue Code of 1986, as amended.)

The Court held that "this language was used by Congress to exert in this field the full measure of its taxing power", id., and that "the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted."[88]: p. 430 

The Court then enunciated what is now understood by Congress and the Courts to be the definition of taxable income, "instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Id. at 431. The defendant in that case suggested that a 1954 rewording of the tax code had limited the income that could be taxed, a position which the Court rejected, stating:

The definition of gross income has been simplified, but no effect upon its present broad scope was intended. Certainly punitive damages cannot reasonably be classified as gifts, nor do they come under any other exemption provision in the Code. We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income.[88]: pp. 432–33 

Tax statutes passed after the ratification of the Sixteenth Amendment in 1913 are sometimes referred to as the "modern" tax statutes. Hundreds of Congressional acts have been passed since 1913, as well as several codifications (i.e., topical reorganizations) of the statutes (see Codification).

In Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978), the U.S. Supreme Court confirmed that wages and income are not identical as far as taxes on income are concerned, because income not only includes wages, but any other gains as well. The Court in that case noted that in enacting taxation legislation, Congress "chose not to return to the inclusive language of the Tariff Act of 1913, but, specifically, 'in the interest of simplicity and ease of administration,' confined the obligation to withhold [income taxes] to 'salaries, wages, and other forms of compensation for personal services'" and that "committee reports ... stated consistently that 'wages' meant remuneration 'if paid for services performed by an employee for his employer'".[88]: p. 27 

Other courts have noted this distinction in upholding the taxation not only of wages, but also of personal gain derived from other sources, recognizing some limitation to the reach of income taxation. For example, in Conner v. United States, 303 F. Supp. 1187 (S.D. Tex. 1969), aff'd in part and rev'd in part, 439 F.2d 974 (5th Cir. 1971), a couple had lost their home to a fire, and had received compensation for their loss from the insurance company, partly in the form of hotel costs reimbursed. The court acknowledged the authority of the IRS to assess taxes on all forms of payment, but did not permit taxation on the compensation provided by the insurance company, because unlike a wage or a sale of goods at a profit, this was not a gain. As the Court noted, "Congress has taxed income, not compensation".

By contrast, other courts have interpreted the Constitution as providing even broader taxation powers for Congress. In Murphy v. IRS, the United States Court of Appeals for the District of Columbia Circuit upheld the federal income tax imposed on a monetary settlement recovery that the same court had previously indicated was not income, stating: "[a]lthough the 'Congress cannot make a thing income which is not so in fact,'... it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9."[89]

Similarly, in Penn Mutual Indemnity Co. v. Commissioner, the United States Court of Appeals for the Third Circuit indicated that Congress could properly impose the federal income tax on a receipt of money, regardless of what that receipt of money is called:

It could well be argued that the tax involved here [an income tax] is an "excise tax" based upon the receipt of money by the taxpayer. It certainly is not a tax on property and it certainly is not a capitation tax; therefore, it need not be apportioned. ... Congress has the power to impose taxes generally, and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will.[90]

Income tax rates in history

History of top rates

 
  Top marginal income tax rates
  Lowest marginal income tax rates
 
 
 
  • In 1913, the top tax rate was 7% on incomes above $500,000 (equivalent to $13.7 million[91] in 2021 dollars) and a total of $28.3 million was collected.[92]
  • During World War I, the top rate rose to 77% and the income threshold to be in this top bracket increased to $1,000,000 (equivalent to $21.2 million[91] in 2021 dollars).
  • Under Treasury Secretary Andrew Mellon, top tax rates were reduced in 1921, 1924, 1926, and 1928. Mellon argued that lower rates would spur economic growth.[93] By 1928, the top rate was scaled down to 24% along with the income threshold for paying this rate lowered to $100,000 (equivalent to $1.58 million[91] in 2021 dollars).
  • During the Great Depression and World War II, the top income tax rate rose from pre-war levels. In 1939, the top rate was 75% applied to incomes above $5,000,000 (equivalent to $97.4 million[91] in 2021 dollars). During 1944 and 1945, the top rate was its all-time high at 94% applied to income above $200,000 (equivalent to $3.08 million[91] in 2021 dollars).
  • The highest marginal tax rate for individuals for U.S. federal income tax purposes for tax years 1952 and 1953 was 92%.[94]
  • From 1964 to 2013, the threshold for paying top income tax rate has generally been between $200,000 and $400,000 (unadjusted for inflation). The one exception is the period from 1982 to 1992 when the topmost income tax brackets were removed. From 1981 until 1986 the top marginal rate was lowered to 50% on $86,000 and up (equivalent to $256,332[91] in 2021 dollars). From 1988 to 1990, the threshold for paying the top rate was even lower, with incomes above $29,750 (equivalent to $68,164[91] in 2021 dollars) paying the top rate of 28% in those years.[95][96]
  • Top tax rates were increased in 1992 and 1994, culminating in a 39.6% top individual rate applicable to all classes of income.
  • Top individual tax rates were lowered in 2004 to 35% and tax rates on dividends and capital gains lowered to 15%, with the Bush administration claiming lower rates would spur economic growth.
  • Based on the summary of federal tax income data in 2009, with a tax rate of 35%, the highest earning 1% of people paid 36.7% of the United States' income tax revenue.[97]
  • In 2012, President Obama announced plans to raise the two top tax rates from 35% to 39.6% and from 33% to 36%.[98]
History of income tax rates adjusted for inflation (1913–2018)[99][100]
Year Number of brackets First bracket Top bracket Comment
Rate Rate Income Adj. 2021[91][101]
1913 7 1% 7% $500,000 $13.7 million First permanent income tax
1916 14 2% 15% $2,000,000 $49.8 million —
1917 21 2% 67% $2,000,000 $42.3 million World War I financing
1918 56 6% 77% $1,000,000 $18 million —
1919 56 4% 73% $1,000,000 $15.6 million —
1922 50 4% 58% $200,000 $3.24 million —
1923 50 3% 43.5% $200,000 $3.18 million —
1924 43 1.5% 46% $500,000 $7.91 million —
1925 23 1.125% 25% $100,000 $1.55 million Post war reductions
1929 23 0.375% 24% $100,000 $1.58 million —
1930 23 1.125% 25% $100,000 $1.62 million —
1932 55 4% 63% $1,000,000 $19.9 million Depression era
1936 31 4% 79% $5,000,000 $97.6 million —
1940 31 4.4% 81.1% $5,000,000 $96.7 million —
1941 32 10% 81% $5,000,000 $92.1 million World War II
1942 24 19% 88% $200,000 $3.32 million Revenue Act of 1942
1944 24 23% 94% $200,000 $3.08 million Individual Income Tax Act of 1944
1946 24 19% 86.45% $200,000 $2.78 million —
1948 24 16.6% 82.13% $400,000 $4.51 million —
1950 24 17.4% 84.36% $400,000 $4.51 million —
1951 24 20.4% 91% $400,000 $4.18 million —
1952 26 22.2% 92% $400,000 $4.08 million —
1954 26 20% 91% $400,000 $4.04 million —
1964 26 16% 77% $400,000 $3.49 million Tax reduction during Vietnam war
1965 25 14% 70% $200,000 $1.72 million —
1968 33 14% 75.25% $200,000 $1.56 million —
1969 33 14% 77% $200,000 $1.48 million —
1970 33 14% 71.75% $200,000 $1.4 million —
1971 33 14% 70% $200,000 $1.34 million —
1981 17 13.825% 69.125% $215,400 $642,021 Reagan era tax cuts
1982 14 12% 50% $85,600 $240,359 Reagan era tax cuts
1983 14 11% 50% $109,400 $297,643 —
1987 5 11% 38.5% $90,000 $214,666 Reagan era tax cuts
1988 2 15% 28% $29,750 $68,164 Reagan era tax cuts
1991 3 15% 31% $82,150 $163,437 Omnibus Budget Reconciliation Act of 1990
1993 5 15% 39.6% $89,150 $167,231 Omnibus Budget Reconciliation Act of 1993
2001 5 10% 39.1% $297,350 $455,050 —
2002 6 10% 38.6% $307,050 $462,592 —
2003 6 10% 35% $311,950 $459,517 Bush tax cuts
2013 7 10% 39.6% $400,000 $465,314 American Taxpayer Relief Act of 2012
2018 7 10% 37% $500,000 $510 thousand Tax Cuts and Jobs Act of 2017

Federal income tax rates

Federal and state income tax rates have varied widely since 1913. For example, in 1954, the federal income tax was based on layers of 24 income brackets at tax rates ranging from 20% to 91% (for a chart, see Internal Revenue Code of 1954).

Below is a table of historical marginal income tax rates for married filing jointly tax payers at stated income levels. These income numbers are not the amounts used in the tax laws at the time.

Controversies

The complexity of the U.S. income tax laws

United States tax law attempts to define a comprehensive[clarification needed] system of measuring income in a complex economy. Many provisions defining income or granting or removing benefits require significant definition of terms. Further, many state income tax laws do not conform with federal tax law in material respects. These factors and others have resulted in substantial complexity. Even venerable legal scholars like Judge Learned Hand have expressed amazement and frustration with the complexity of the U.S. income tax laws. In the article, Thomas Walter Swan, 57 Yale Law Journal No. 2, 167, 169 (December 1947), Judge Hand wrote:

In my own case the words of such an act as the Income Tax ... merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception—couched in abstract terms that offer [me] no handle to seize hold of [and that] leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.

Complexity is a separate issue from flatness of rate structures. Also, in the United States, income tax laws are often used by legislatures as policy instruments for encouraging numerous undertakings deemed socially useful — including the buying of life insurance, the funding of employee health care and pensions, the raising of children, home ownership, and the development of alternative energy sources and increased investment in conventional energy. Special tax provisions granted for any purpose increase complexity, irrespective of the system's flatness or lack thereof.

Proposals for changes of income taxation

Proposals have been made frequently to change tax laws, often with the backing of specific interest groups. Organizations making such proposals include Citizens for Tax Justice, Americans for Tax Reform, Americans for Tax Fairness, Citizens for an Alternative Tax System, Americans For Fair Taxation, and FreedomWorks. Various proposals have been put forth for tax simplification in Congress including the Fair Tax Act and various Flat tax plans.

Alternatives

Proponents of a consumption tax argue that the income tax system creates perverse incentives by encouraging taxpayers to spend rather than save: a taxpayer is only taxed once on income spent immediately, while any interest earned on saved income is itself taxed.[103] To the extent that this is considered unjust, it may be remedied in a variety of ways, e.g. excluding investment income from taxable income, making investments deductible and therefore only taxing them when gains are realized, or replacing the income tax by other forms of tax, such as a sales tax.[104]

Taxation vs. the states

Some economists believe income taxation offers the federal government a technique to diminish the power of the states, because the federal government is then able to distribute funding to states with conditions attached, often giving the states no choice but to submit to federal demands.[105]

Tax protestors

Numerous tax protester arguments have been raised asserting that the federal income tax is unconstitutional, including discredited claims that the Sixteenth Amendment was not properly ratified. All such claims have been repeatedly rejected by the federal courts as frivolous.[106]

Distribution

Further information: Progressivity in United States income tax
 
Distribution of U.S. federal taxes for 2000 as a percentage of income among the family income quintiles.
 
CBO chart illustrating the percent reduction in income inequality due to federal taxes and income transfers from 1979 to 2011.[107]

In the United States, a progressive tax system is employed which equates to higher income earners paying a larger percentage of their income in taxes. According to the IRS, the top 1% of income earners for 2008 paid 38% of income tax revenue, while earning 20% of the income reported.[108] The top 5% of income earners paid 59% of the total income tax revenue, while earning 35% of the income reported.[108] The top 10% paid 70%, earning 46% and the top 25% paid 86%, earning 67%. The top 50% paid 97%, earning 87% and leaving the bottom 50% paying 3% of the taxes collected and earning 13% of the income reported.[108]

From 1979 to 2007 the average federal income tax rate fell 110% for the second lowest quintile, 56% for the middle quintile, 39% for the fourth quintile, 8% for the highest quintile, and 15% for the top 1%, with the bottom quintile moving from a tax rate of zero to negative liability. Despite this, individual income tax revenue only dropped from 8.7 to 8.5% of GDP over that time, and total federal revenue was 18.5% of GDP in both 1979 and 2007, above the postwar average of 18%.[109] Tax code changes have dropped millions of lower earning people from the federal income tax rolls in recent decades. Those with zero or negative liability who were not claimed as dependents by a payer increased from 14.8% of the population in 1984 to 49.5% in 2009.[110][111]

While there is consensus that overall federal taxation is progressive, there is dispute over whether progressivity has increased or decreased in recent decades, and by how much.[112][113] The total effective federal tax rate for the top 0.01% of income earners declined from around 75% to around 35% between 1960 and 2005.[112] Total effective federal tax rates fell from 19.1% to 12.5% for the three middle quintiles between 1979 and 2010, from 27.1% to 24% for the top quintile, from 7.5% to 1.5% for the bottom quintile, and from 35.1% to 29.4% for the top 1%.[114]

A 2008 OECD study ranked 24 OECD nations by progressiveness of taxes and separately by progressiveness of cash transfers, which include pensions, unemployment and other benefits. The United States had the highest concentration coefficient in income tax, a measure of progressiveness, before adjusting for income inequality. The United States was not at the top of either measure for cash transfers. Adjusting for income inequality, Ireland had the highest concentration coefficient for income taxes. In 2008, overall income tax rates for the US were below the OECD average.[115]

Effects on income inequality

Further information: Income inequality in the United States

According to the CBO, U.S. federal tax policies substantially reduce income inequality measured after taxes. Taxes became less progressive (i.e., they reduced income inequality relatively less) measured from 1979 to 2011. The tax policies of the mid-1980s were the least progressive period since 1979. Government transfer payments contributed more to reducing inequality than taxes.[107]

See also

Other federal taxation:

US State taxes:

Politics:

General:

Explanatory notes

  1. ^ Contrary to common misconception, residents of Puerto Rico do pay U.S. federal taxes: customs taxes (which are subsequently returned to the Puerto Rico Treasury) (See Dept of the Interior, Office of Insular Affairs. DOI.gov) 2012-06-10 at the Wayback Machine, import/export taxes (See Stanford.wellsphere.com) 2010-04-01 at the Wayback Machine, federal commodity taxes (See Stanford.wellsphere.com) , social security taxes (See IRS.gov), etc. Residents pay federal payroll taxes, such as Social Security (See IRS.gov) and Medicare (See Reuters.com), as well as Commonwealth of Puerto Rico income taxes (See Puertorico-herald.org and HTRCPA.com April 29, 2011, at the Wayback Machine). All federal employees (See Heritage.org) 2010-02-10 at the Wayback Machine, those who do business with the federal government (See MCVPR.com) May 15, 2011, at the Wayback Machine, Puerto Rico-based corporations that intend to send funds to the U.S. (See p. 9, line 1.) September 3, 2009, at the Wayback Machine, and some others (For example, Puerto Rican residents that are members of the U.S. military, See Heritage.org  ; and Puerto Rico residents who earned income from sources outside Puerto Rico, See also pay federal income taxes. In addition, because the cutoff point for income taxation is lower than that of the U.S. IRS code, and because the per-capita income in Puerto Rico is much lower than the average per-capita income on the mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. This occurs because "the Commonwealth of Puerto Rico government has a wider set of responsibilities than do U.S. State and local governments" (See GAO.gov). As residents of Puerto Rico pay into Social Security, Puerto Ricans are eligible for Social Security benefits upon retirement, but are excluded from the Supplemental Security Income (SSI) (Commonwealth of Puerto Rico residents, unlike residents of the Commonwealth of the Northern Mariana Islands and residents of the 50 States, do not receive the SSI. See Socialsecurity.gov), and the island actually receives less than 15% of the Medicaid funding it would normally receive if it were a U.S. state. However, Medicare providers receive less-than-full state-like reimbursements for services rendered to beneficiaries in Puerto Rico, even though the latter paid fully into the system (See p 252). 2011-05-11 at the Wayback Machine In general, "many federal social welfare programs have been extended to Puerto Rican (sic) residents, although usually with caps inferior to those allocated to the states." (The Louisiana Purchase and American Expansion: 1803–1898. By Sanford Levinson and Bartholomew H. Sparrow. New York: Rowman and Littlefield Publishers. 2005. Page 167. For a comprehensive coverage of federal programs made extensive to Puerto Rico see Richard Cappalli's Federal Aid to Puerto Rico (1970)). It has also been estimated (See Egleforum.org) that, because the population of the Island is greater than that of 50% of the States, if it were a state, Puerto Rico would have six to eight seats in the House, in addition to the two seats in the Senate.(See Eagleforum.org, CRF-USA.org 2009-06-10 at the Wayback Machine and Thomas.gov February 1, 2016, at the Wayback Machine [For the later, the official U.S. Congress database website, you will need to resubmit a query. The document in question is called "House Report 110-597 - Puerto Rico Democracy Act of 2007." These are the steps to follow: THOMAS.gov September 29, 2006, at the Wayback Machine > Committee Reports > 110 > drop down "Word/Phrase" and pick "Report Number" > type "597" next to Report Number. This will provide the document "House Report 110-597 - 2007", then from the Table of Contents choose "Background and need for legislation".). Another misconception is that the import/export taxes collected by the U.S. on products manufactured in Puerto Rico are all returned to the Puerto Rico Treasury. This is not the case. Such import/export taxes are returned only for rum products, and even then the US Treasury keeps a portion of those taxes (See the "House Report 110-597 - Puerto Rico Democracy Act of 2007" mentioned above.)

References

  1. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 4 (2nd Ed. 2007).
  2. ^ a b Id.
  3. ^ See below for additional reading. The U.S. Internal Revenue Service offers many free publications which are available online, including one for individuals and one for corporations, in both .pdf and web formats. An incomplete index is available by topic. Many states offer similar publications.
  4. ^ "Iowa Tax/Fee Descriptions and Rates". Iowa Department of Revenue. Retrieved May 5, 2023.
  5. ^ a b CCH State Tax Handbook 2018, page 617, et seq.
  6. ^ Durante, Alex (October 18, 2022). "2023 Tax Brackets". Tax Foundation. Retrieved May 5, 2023.
  7. ^ CCH State Tax Handbook 2018, page 254, et seq.
  8. ^ "eCFR :: Title 26 of the CFR -- Internal Revenue". Code of Federal Regulations. Retrieved May 5, 2023.
  9. ^ IRS instructions for Form 1120 Schedule M-3
  10. ^ "Overview of the Federal Tax System as in Effect for 2022". Joint Committee on Taxation. Retrieved May 5, 2023.
  11. ^ "IRS Pub. 502" (PDF). IRS. Note: limit is 7.5% for those over age 65.
  12. ^ "Questions and Answers for the Additional Medicare Tax". Internal Revenue Service. Retrieved July 6, 2018.
  13. ^ "Chart C—Other Situations When You Must File" (PDF). IRS. Retrieved September 30, 2014.
  14. ^ "Income inequality: Top 1 percent took record share of 2012 U.S. income, Associated Press, Sept. 10, 2013
  15. ^ a b c "The Distribution of Household Income and Federal Taxes, 2010". The US Congressional Budget Office (CBO). December 4, 2013. Retrieved January 6, 2014.
  16. ^ "It matters how tax brackets are adjusted". Tax Foundation. October 10, 2014. Retrieved March 16, 2016.
  17. ^ "IRS.gov" (PDF). irs.gov. Retrieved August 19, 2018.
  18. ^ "Publication 505 (2018), Tax Withholding and Estimated Tax - Internal Revenue Service". www.irs.gov. Retrieved August 19, 2018.
  19. ^ "IRS.gov – 2012 Tax Rate Tables" (PDF). irs.gov. Retrieved August 19, 2018.
  20. ^ 26 USC 1411.
  21. ^ "IRS Pub 17, 2013" (PDF). irs.gov. Retrieved August 19, 2018.
  22. ^ "IRS Pub. 17, 2014" (PDF). irs.gov. Retrieved August 19, 2018.
  23. ^ "IRS Pub. 17, 2015" (PDF). irs.gov. Retrieved August 19, 2018.
  24. ^ "IRS Rev Proc 15-53" (PDF). irs.gov. Retrieved August 19, 2018.
  25. ^ "IRS Rev Proc 2016-55" (PDF). irs.gov. Retrieved August 19, 2018.
  26. ^ Individual Tax Reform
  27. ^ "What are the 2019 tax brackets for federal income taxes?". June 26, 2019.
  28. ^ "2020 Tax Brackets". November 14, 2019.
  29. ^ "2021 Tax Brackets". October 27, 2020.
  30. ^ "2022 Tax Brackets". November 10, 2021.
  31. ^ "2023 Tax Brackets". October 18, 2022.
  32. ^ IRS 1040 Instructions for 2016: Tax Tables, page 81.
  33. ^ "Payroll Tax Cut to Boost Take-Home Pay for Most Workers". irs.gov. Retrieved August 19, 2018.
  34. ^ "Effective Income Tax Rates". The New York Times. January 17, 2012.
  35. ^ "The Distribution of Household Income and Federal Taxes, 2011". Congressional Budget Office. November 12, 2014. Retrieved January 20, 2015.
  36. ^ a b 26 USC 61.
  37. ^ 26 CFR 1.61-1(a).
  38. ^ 26 USC 162, et seq.
  39. ^ IRS Publication 535, Business Expenses; Fox chapter 22, Hoffman chapters 6 and 7, Pratt chapters 7 and 10.
  40. ^ 26 USC 263.
  41. ^ 26 USC 168, et seq, IRS Publication 946, How to Depreciate Property; Fox chapter 24, Hoffman chapter 8, Pratt chapter 9.
  42. ^ 26 USC 1011, et seq., IRS Topic 409, Capital Gains and Losses, Fox chapters 13–14, Hoffman chapters 13–14, Pratt chapters 14–17.
  43. ^ 26 USC 269, IRS Publication 925, Passive Activities. Losses from an activity are deductible against other income on disposal of the activity.
  44. ^ 26 USC 151.
  45. ^ 26 USC 262, 163, 164, 170; IRS Form 1040, Schedule A; Fox chapter 21, Hoffman chapter 10, Pratt chapter 11.
  46. ^ 26 USC 265, et seq.
  47. ^ "With new SALT limit, IRS explains tax treatment of state and local tax refunds | Internal Revenue Service". www.irs.gov. Retrieved February 8, 2022.
  48. ^ 26 USC 68.
  49. ^ 26 USC 121.
  50. ^ See generally 26 USC 1045, IRS Topic 409, Capital Gains and Losses and Publication 535, above; Fox chapters 13-14, Hoffman chapters 13–14, Pratt chapters 16–17.
  51. ^ Lowrey, Annie (January 4, 2013). "Tax Code May Be the Most Progressive Since 1979". The New York Times. Retrieved January 6, 2014.
  52. ^ Fox, chapter 32; Hoffman, chapter 16; Pratt, chapter 5.
  53. ^ "Partnerships | Internal Revenue Service". www.irs.gov. Retrieved February 8, 2022.
  54. ^ "Forming a Corporation | Internal Revenue Service". www.irs.gov. Retrieved February 8, 2022.
  55. ^ "Contribution and Benefit Base". www.ssa.gov. Retrieved July 23, 2020.
  56. ^ "26 U.S. Code § 21 - Expenses for household and dependent care services necessary for gainful employment". LII / Legal Information Institute. Retrieved February 8, 2022.
  57. ^ "EITC Income Limits Maximum Credit Amounts - Internal Revenue Service". www.irs.gov. Retrieved August 19, 2018.
  58. ^ See, e.g., CCH 2013 State Tax Handbook, ISBN 978-0-8080-3227-4, Fox Income Tax in the USA, appendix, ISBN 978-0-9851823-3-5, ASIN B00BCSNOGG.
  59. ^ All residents of PR pay federal taxes, with the exception of federal income taxes which only some residents of Puerto Rico must still pay.
  60. ^ 26 USC 871 and [ 26 USC 881].
  61. ^ 26 USC 871(b), 26 USC 881, and 26 USC 897.
  62. ^ 26 USC 6012.
  63. ^ Publication 509: Tax Calendars for use in 2017, U.S. Internal Revenue Service, Cat. No. 15013X
  64. ^ "IRS Can Audit for Three Years, Six, or Forever: Here's How to Tell". www.americanbar.org. Retrieved February 8, 2022.
  65. ^ "U.S. Constitution - Article 1 Section 8 - The U.S. Constitution Online - USConstitution.net". usconstitution.net. Retrieved August 19, 2018.
  66. ^ Hylton v. United States, 3 U.S. 171 (1796). Penn Mutual Indemnity Co. v. Commissioner, 227 F.2d 16, 19–20 (3rd Cir. 1960).
  67. ^ Steward Machine Co. v. Davis, 301 U.S. 548 (1937), 581–582
  68. ^ . Taxworld. Archived from the original on January 20, 2019. Retrieved December 7, 2013.
  69. ^ Joseph A. Hill, "The Civil War Income Tax", Quarterly Journal of Economics Vol. 8, No. 4 (July 1894), pp. 416–452. JSTOR 1885003; appendix: JSTOR 1885007.
  70. ^ Weisman (2002), pp. 30–35.
  71. ^ Weisman (2002), pp. 40–42.
  72. ^ Pollack, Sheldon D. (2014). "The First National Income Tax, 1861–1872" (PDF). Tax Lawyer. 67 (2).
  73. ^ Weisman (2002), pp. 99–101.
  74. ^ Charles F. Dunbar, "The New Income Tax", Quarterly Journal of Economics, Vol. 9, No. 1 (Oct. 1894), pp. 26–46. JSTOR 1883633.
  75. ^ Chief Justice Fuller's opinion, 158 U.S. 601, 634 December 6, 2008, at the Wayback Machine.
  76. ^ a b Origins of the Modern Income Tax, 1894–1913, p. 18 , University of Delaware
  77. ^ December 3, 1906: Sixth Annual Message
  78. ^ Munsey's Magazine, Volume 46
  79. ^ Roosevelt said: The first purely income-tax law was past by the Congress in 1861, but the most important law dealing with the subject was that of 1894. This the court held to be unconstitutional. The question is undoubtedly very intricate, delicate, and troublesome. The decision of the court was only reached by one majority. It is the law of the land, and of course is accepted as such and loyally obeyed by all good citizens.
  80. ^ December 3, 1907: Seventh Annual Message
  81. ^ Theodore Roosevelt's Confession of Faith Before the Progressive National Convention
  82. ^ William Howard Taft, Jeffrey Rosen
  83. ^ a b June 16, 1909: Message Regarding Income Tax, William Howard Taft
  84. ^ The 16th Amendment and 100 years of Federal income taxes, Library of Congress
  85. ^ United States Government Printing Office, at Amendments to the Constitution of the United States of America 2008-02-05 at the Wayback Machine; see generally United States v. Thomas, 788 F.2d 1250 (7th Cir. 1986), cert. denied, 107 S.Ct. 187 (1986); Ficalora v. Commissioner, 751 F.2d 85, 85-1 U.S. Tax Cas. (CCH) ¶ 9103 (2d Cir. 1984); Sisk v. Commissioner, 791 F.2d 58, 86-1 U.S. Tax Cas. (CCH) ¶ 9433 (6th Cir. 1986); United States v. Sitka, 845 F.2d 43, 88-1 U.S. Tax Cas. (CCH) ¶ 9308 (2d Cir.), cert. denied, 488 U.S. 827 (1988); United States v. Stahl, 792 F.2d 1438, 86-2 U.S. Tax Cas. (CCH) ¶ 9518 (9th Cir. 1986), cert. denied, 107 S. Ct. 888 (1987); Brown v. Commissioner, 53 T.C.M. (CCH) 94, T.C. Memo 1987–78, CCH Dec. 43,696(M) (1987); Lysiak v. Commissioner, 816 F.2d 311, 87-1 U.S. Tax Cas. (CCH) ¶ 9296 (7th Cir. 1987); Miller v. United States, 868 F.2d 236, 89-1 U.S. Tax Cas. (CCH) ¶ 9184 (7th Cir. 1989); also, see generally Boris I. Bittker, Constitutional Limits on the Taxing Power of the Federal Government, The Tax Lawyer, Fall 1987, Vol. 41, No. 1, p. 3 (American Bar Ass'n).
  86. ^ Memorandum Opinion, p. 14, Dec. 17, 2007, docket entry 106, United States v. Benson, case no. 1:04-cv-07403, United States District Court for the Northern District of Illinois, Eastern Division.
  87. ^ Memorandum Opinion, p. 9, Dec. 17, 2007, docket entry 106, United States v. Benson, case no. 1:04-cv-07403, United States District Court for the Northern District of Illinois, Eastern Division.
  88. ^ a b c d 348 U.S.
  89. ^ Opinion on rehearing, July 3, 2007, p. 16, Murphy v. Internal Revenue Service and United States, case no. 05-5139, United States Court of Appeals for the District of Columbia Circuit, 2007-2 U.S. Tax Cas. (CCH) ¶ 50,531 (D.C. Cir. 2007).
  90. ^ Penn Mutual Indemnity Co. v. Commissioner, 277 F.2d 16, 60-1 U.S. Tax Cas. (CCH) ¶ 9389 (3d Cir. 1960) (footnotes omitted).
  91. ^ a b c d e f g h 1634–1699: McCusker, J. J. (1997). How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States: Addenda et Corrigenda (PDF). American Antiquarian Society. 1700–1799: McCusker, J. J. (1992). How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States (PDF). American Antiquarian Society. 1800–present: Federal Reserve Bank of Minneapolis. "Consumer Price Index (estimate) 1800–". Retrieved April 16, 2022.
  92. ^ "Distribution of the Income Tax". The Independent. July 20, 1914. Retrieved August 23, 2012.
  93. ^ Tax History Project, under year 1920.
  94. ^ Page 12 of Instructions for 1952 Form 1040, Internal Revenue Service, U.S. Department of the Treasury; page 12 of Instructions for 1953 Form 1040, Internal Revenue Service, U.S. Department of the Treasury.
  95. ^ History of Federal Individual Income Bottom and Top Bracket Rates. Retrieved 2010-02-04.
  96. ^ Guenther, Gary (February 12, 2018). Individual Income Tax Rates and Other Key Elements of the Federal Individual Income Tax: 1988 to 2017 (PDF). Washington, D.C.: Congressional Research Service. Retrieved February 25, 2018.
  97. ^ Logan, D. S. (24 October 2011). "Summary of latest federal individual income tax data". Tax Foundation.
  98. ^ "Outline of Major Tax Law Provisions in 2013 under Multiple Scenarios" (12 April 2012). Tax Foundation.
  99. ^ Personal Exemptions and Individual Income Tax Rates: 1913–2002, Internal Revenue Service
  100. ^ U.S. Federal Individual Marginal Income Tax Rates History, 1913–2009 2013-01-16 at the Wayback Machine, The Tax Foundation.
  101. ^ CPI Inflation Calculator
  102. ^ U.S. Federal Individual Income Tax Rates History, 1913–2011 (Nominal and Inflation-Adjusted Brackets)Tax Foundation. Accessed: 10 November 2011.
  103. ^ John Stuart Mill's argument, reported by Marvin A. Chirelstein, Federal Income Taxation, p. 433 (Foundation Press, 10th Ed., 2005)
  104. ^ Chirelstein, loc.cit.
  105. ^ (PDF). cato.org. Archived from the original (PDF) on February 27, 2012. Retrieved August 19, 2018.
  106. ^ "The Truth About Frivolous Tax Arguments". March 4, 2013. Retrieved July 30, 2013.
  107. ^ a b "The Distribution of Household Income and Federal Taxes 2011". Congressional Budget Office, US Government. November 2014.
  108. ^ a b c McCormally, Kevin (December 18, 2010). "Where Do You Rank as a Taxpayer?". Kiplinger. Retrieved June 18, 2010.
  109. ^ Reynolds, Alan (May 3, 2011). "The Increasing Progressivity of U.S. Taxes: And the Shrinking Tax Base". Cato Institute. Retrieved January 18, 2014.
  110. ^ Bluey, Rob (February 19, 2012). "Chart of the Week: Nearly Half of All Americans Don't Pay Income Taxes". Heritage Foundation. Retrieved October 28, 2013.
  111. ^ Will Freeland; Scott A. Hodge (July 20, 2012). "Tax Equity and the Growth in Nonpayers". Tax Foundation. Retrieved October 28, 2013.
  112. ^ a b Thomas Piketty; Emmanuel Saez (2007). "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective" (PDF). Journal of Economic Perspectives. 21 (1): 23–24. doi:10.1257/jep.21.1.3. S2CID 5160267. Retrieved January 25, 2014.
  113. ^ Michael D. Stroup; Keith Hubbard (August 2013). "An improved index and estimation method for assessing tax progressivity" (PDF). Mercatus Center, George Mason University. Retrieved January 18, 2014.
  114. ^ "The Distribution of Household Income and Federal Taxes, 2010". Congressional Budget Office. December 4, 2013. Retrieved January 21, 2014.
  115. ^ Growing Unequal?: Income Distribution and Poverty in OECD Countries, OECD Publishing, ISBN 978-92-64-04418-0, 2008, pgs. 103, 104.

Further reading

Government sources:

  • IRS Publication 17, Your Federal Income Tax
  • IRS Publication 334, Tax Guide for Small Business
  • IRS Publication 509, Tax Calendar
  • IRS Publication 541, Partnerships
  • IRS Publication 542, Corporations
  • IRS Publication 544, Sales and Other Dispositions of Assets
  • IRS Publication 556 Examination of Returns, Appeal Rights, and Claims for Refund
  • IRS Tax Topics
  • IRS videos on tax topics
  • IRS links to state websites

Law & regulations:

  • Federal tax law, 26 USC

Texts:

History:

  • Buenker, John D. The Income Tax and the Progressive Era (Routledge, 2018) excerpt.
  • Ellis, Elmer. "Public Opinion and the Income Tax, 1860-1900." Mississippi Valley Historical Review 27.2 (1940): 225-242 online.
  • Ratner, Sidney. American Taxation: Its History as a Social Force in Democracy (1942) online
  • Thorndike, Joseph J. Their Fair Share: Taxing the Rich in the Age of FDR. Washington, DC: Urban Institute, 2013.
  • Weisman, Steven R. (2002). The Great Tax Wars: Lincoln to Wilson-The Fierce Battles over Money That Transformed the Nation. Simon & Schuster. ISBN 0-684-85068-0.

Reference works (annual):

  • CCH U.S. Master Tax Guide, 2013 ISBN 978-0-8080-2980-9
  • RIA Federal Tax Handbook 2013 ISBN 978-0-7811-0472-2
  • Dauchy, E. P., & Balding, C. (2013). Federal Income Tax Revenue Volatility Since 1966. Working Papers w0198, Center for Economic and Financial Research (CEFIR). Available at SSRN 2351376.

Consumer publications (annual):

May 16, 2023
income, united, states, united, states, federal, government, most, state, governments, impose, income, they, determined, applying, rate, which, increase, income, increases, taxable, income, which, total, income, less, allowable, deductions, income, broadly, de. The United States federal government and most state governments impose an income tax They are determined by applying a tax rate which may increase as income increases to taxable income which is the total income less allowable deductions Income is broadly defined Individuals and corporations are directly taxable and estates and trusts may be taxable on undistributed income Partnerships are not taxed with some exceptions in the case of federal income taxation but their partners are taxed on their shares of partnership income Residents and citizens are taxed on worldwide income while nonresidents are taxed only on income within the jurisdiction Several types of credits reduce tax and some types of credits may exceed tax before credits An alternative tax applies at the federal and some state levels The 2015 edition of Form 1040 the tax form used for personal federal income tax returns filed by U S residents In the United States the term payroll tax usually refers to FICA taxes that are paid to fund Social Security and Medicare while income tax refers to taxes that are paid into state and federal general funds Most business expenses are deductible Individuals may deduct certain personal expenses including home mortgage interest state taxes contributions to charity and some other items Some deductions are subject to limits Capital gains are taxable and capital losses reduce taxable income to the extent of gains plus in certain cases 3 000 or 1 500 of ordinary income Individuals currently pay a lower rate of tax on capital gains and certain corporate dividends Taxpayers generally must self assess income tax by filing tax returns Advance payments of tax are required in the form of withholding tax or estimated tax payments Taxes are determined separately by each jurisdiction imposing tax Due dates and other administrative procedures vary by jurisdiction April 15 following the tax year is the deadline for individuals to file tax returns for federal and many state and local returns Tax as determined by the taxpayer may be adjusted by the taxing jurisdiction Contents 1 Basics 1 1 Sources of U S income tax laws 1 2 Basic concepts 1 3 Federal income tax rates for individuals 1 4 Marginal tax rates 1 5 Example of a tax computation 1 6 Effective income tax rates 2 Taxable income 2 1 Gross income 2 2 Business deductions 2 3 Personal deductions 2 4 Retirement savings and fringe benefit plans 2 5 Capital gains 2 6 Accounting periods and methods 3 Other taxable and tax exempt entities 3 1 Partnerships and LLCs 3 2 Corporations 3 2 1 Corporate tax rates 3 2 2 Deductions for corporations 3 3 Estates and trusts 3 4 Tax exempt entities 4 Social insurance taxes Social Security tax and Medicare tax or FICA 5 Other tax items 5 1 Credits 5 2 Alternative minimum tax 5 3 Special taxes 5 4 Special industries 6 State local and territorial income taxes 7 International aspects 8 Tax collection and examinations 8 1 Tax returns 8 2 Tax collection 8 3 Withholding of tax 8 4 Statute of limitations 8 5 Penalties 9 History 9 1 Constitutional 9 2 Early federal income taxes 9 3 Progressive Era 9 4 Ratification of the Sixteenth Amendment 9 5 Modern interpretation of the power to tax incomes 9 6 Income tax rates in history 9 6 1 History of top rates 9 6 2 Federal income tax rates 10 Controversies 10 1 The complexity of the U S income tax laws 10 2 Proposals for changes of income taxation 10 3 Alternatives 10 4 Taxation vs the states 10 5 Tax protestors 10 6 Distribution 10 7 Effects on income inequality 11 See also 12 Explanatory notes 13 References 14 Further readingBasics EditSources of U S income tax laws Edit United States income tax law comes from a number of sources These sources have been divided by one author into three tiers as follows 1 Tier 1 United States Constitution Internal Revenue Code IRC legislative authority written by the United States Congress through legislation Treasury regulations Federal court opinions judicial authority written by courts as interpretation of legislation Treaties executive authority written in conjunction with other countries subject to ratification in the United States by advice and consent of the U S Senate other countries have their own ratification procedures Tier 2 Agency interpretative regulations executive authority written by the Internal Revenue Service IRS and Department of the Treasury including Final Temporary and Proposed Regulations promulgated under IRC 7805 or other specific statutory authority Treasury Notices and Announcements Executive agreements with other countries Public Administrative Rulings IRS Revenue Rulings which provide informal guidance on specific questions and are binding on all taxpayers Tier 3 Legislative History Private Administrative Rulings private parties may approach the IRS directly and ask for a Private Letter Ruling on a specific issue these rulings are binding only on the requesting taxpayer Where conflicts exist between various sources of tax authority an authority in Tier 1 outweighs an authority in Tier 2 or 3 Similarly an authority in Tier 2 outweighs an authority in Tier 3 2 Where conflicts exist between two authorities in the same tier the last in time rule is applied As the name implies the last in time rule states that the authority that was issued later in time is controlling 2 Regulations and case law serve to interpret the statutes Additionally various sources of law attempt to do the same thing Revenue Rulings for example serves as an interpretation of how the statutes apply to a very specific set of facts Treaties serve in an international realm Basic concepts Edit A tax is imposed on net taxable income in the United States by the federal most state and some local governments 3 Income tax is imposed on individuals corporations estates and trusts 4 The definition of net taxable income for most sub federal jurisdictions mostly follows the federal definition 5 The rate of tax at the federal level is graduated that is the tax rates on higher amounts of income are higher than on lower amounts Federal individual tax rates vary from 10 to 37 6 Some states and localities impose an income tax at a graduated rate and some at a flat rate on all taxable income 7 Individuals are eligible for a reduced rate of federal income tax on capital gains and qualifying dividends The tax rate and some deductions are different for individuals depending on filing status Married individuals may compute tax as a couple or separately Single individuals may be eligible for reduced tax rates if they are head of a household in which they live with a dependent Taxable income is defined in a comprehensive manner in the Internal Revenue Code and tax regulations issued by the Department of Treasury and the Internal Revenue Service 8 Taxable income is gross income as adjusted minus deductions Most states and localities follow these definitions at least in part 5 though some make adjustments to determine income taxed in that jurisdiction Taxable income for a company or business may not be the same as its book income 9 Gross income includes all income earned or received from whatever source This includes salaries and wages tips pensions fees earned for services price of goods sold other business income gains on sale of other property rents received interest and dividends received proceeds from selling crops and many other types of income Some income such as municipal bond interest is exempt from income tax Federal receipts by source as share of total receipts 1950 2014 Individual income taxes purple payroll taxes FICA azure corporate income taxes green excise taxes orange estate and gift taxes yellow other receipts blue 10 Adjustments usually reductions to gross income of individuals are made for contributions to many types of retirement or health savings plans certain student loan interest half of self employment tax and a few other items The cost of goods sold in a business is a direct reduction of gross income Business deductions Taxable income of all taxpayers is reduced by deductions for expenses related to their business These include salaries rent and other business expenses paid or accrued as well as allowances for depreciation The deduction of expenses may result in a loss Generally such loss can reduce other taxable income subject to some limits Personal deductions The former deduction for personal exemptions was repealed for 2018 through 2025 Standard deduction Individuals get a deduction from taxable income for certain personal expenses An individual may claim a standard deduction For 2021 the basic standard deduction was 12 550 for single individuals or married persons filing separately 25 100 for a joint return or surviving spouse and 18 800 for a head of household Itemized deductions Those who choose to claim actual itemized deductions may deduct the following subject to many conditions and limitations Medical expenses in excess of 10 of adjusted gross income 11 Certain taxes limited to 10 000 or 5 000 in 2018 through 2025 Home mortgage interest Contributions to charities Losses on nonbusiness property due to casualty and Deductions for expenses incurred in the production of income in excess of 2 of adjusted gross income Capital gains Capital gains include gains on selling stocks and bonds real estate and other capital assets The gain is the excess of the proceeds over the adjusted tax basis cost less depreciation deductions allowed of the property This lower rate of tax also applies to qualified dividends from U S corporations and many foreign corporations There are limits on how much net capital loss may reduce other taxable income Total U S tax revenue as a of GDP and income tax revenue as a of GDP 1945 2011 from Office of Management and Budget historicals Tax credits All taxpayers are allowed a credit for foreign taxes and for a percentage of certain types of business expenses Individuals are also allowed credits related to education expenses retirement savings and child care expenses Each of the credits is subject to specific rules and limitations Some credits are treated as refundable payments Alternative minimum tax All taxpayers are also subject to the Alternative Minimum Tax if their income exceeds certain exclusion amounts This tax applies only if it exceeds regular income tax and is reduced by some credits Additional Medicare tax High income earners may also have to pay an additional 0 9 tax on wages compensation and self employment income 12 Net investment income tax Net investment income is subject to an additional 3 8 tax for individuals with income in excess of certain thresholds Tax returns U S corporations and most resident individuals must file income tax returns to self assess income tax if any tax is due or to claim a tax refund Some taxpayers must file an income tax return because they satisfy one of the several other conditions 13 Tax returns may be filed electronically Generally an individual s tax return covers the calendar year Corporations may elect a different tax year Most states and localities follow the federal tax year and require separate returns Tax payment Taxpayers must pay income tax due without waiting for an assessment Many taxpayers are subject to withholding taxes when they receive income To the extent withholding taxes do not cover all taxes due all taxpayers must make estimated tax payments or face penalties Tax penalties Failing to make payments on time or failing to file returns can result in substantial penalties Certain intentional failures may result in jail time Tax returns may be examined and adjusted by tax authorities Taxpayers have rights to appeal any change to tax and these rights vary by jurisdiction Taxpayers may also go to court to contest tax changes Tax authorities may not make changes after a certain period of time generally three or four years from the tax return due date Federal income tax rates for individuals Edit As of 2010 68 8 of federal individual tax receipts including payroll taxes were paid by the top 20 of taxpayers by income group which earned 50 of all household income The top 1 which took home 19 3 paid 24 2 whereas the bottom 20 paid 0 4 due to deductions and the earned income tax credit 14 15 Federal income brackets and tax rates for individuals are adjusted annually for inflation The Internal Revenue Service IRS accounts for changes to the CPI 16 and publishes the new rates as Tax Rate Schedules Marginal tax rates Edit Marginal and effective federal tax rates on Adjusted Gross Income AGI in the U S for 2018 Share of US individual income taxes vs share of Adjusted Gross Income AGI Half of taxpayers paid 97 7 percent of federal individual income taxes per York 2023 using 2020 data from the US Internal Revenue Service IRS The effective tax rate on the 1 percent highest adjusted gross incomes AGIs was 26 percent almost double 1 91 times the average while the effective tax rate for the bottom half was 3 1 percent only 23 percent of the average A different perspective using gross income rather than AGI appears in work by Leiserson and Yagan 2021 published by the Biden White House Leiserson and Yagan estimated that the average federal effective individual income tax rate paid by America s 400 wealthiest families was between 6 and 12 percent with the most likely number being 8 2 percent The difference comes in the adjustments while the uncertainty comes from unsold stock which is taxed at a maximum of 20 percent when sold and never taxed if passed as inheritance Erica York January 26 2023 Summary of the Latest Federal Income Tax Data 2023 Update Tax Foundation Wikidata Q118189145 Greg Leiserson Danny Yagan September 23 2021 What Is the Average Federal Individual Income Tax Rate on the Wealthiest Americans White House Wikidata Q118192958 Marginal tax rates and income brackets for 2010Marginal tax rate 17 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 8 375 0 16 750 0 8 375 0 11 95015 8 376 34 000 16 751 68 000 8 376 34 000 11 951 45 55025 34 001 82 400 68 001 137 300 34 001 68 650 45 551 117 65028 82 401 171 850 137 301 209 250 68 651 104 625 117 651 190 55033 171 851 373 650 209 251 373 650 104 626 186 825 190 551 373 65035 373 651 373 651 186 826 373 651 Marginal tax rates and income brackets for 2011Marginal tax rate 18 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 8 500 0 17 000 0 8 500 0 12 15015 8 501 34 500 17 001 69 000 8 501 34 500 12 151 46 25025 34 501 83 600 69 001 139 350 34 501 69 675 46 251 119 40028 83 601 174 400 139 351 212 300 69 676 106 150 119 401 193 35033 174 401 379 150 212 301 379 150 106 151 189 575 193 351 379 15035 379 151 379 151 189 576 379 151 Marginal tax rates and income brackets for 2012Marginal tax rate 19 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 8 700 0 17 400 0 8 700 0 12 40015 8 701 35 350 17 401 70 700 8 701 35 350 12 401 47 35025 35 351 85 650 70 701 142 700 35 351 71 350 47 351 122 30028 85 651 178 650 142 701 217 450 71 351 108 725 122 301 198 05033 178 651 388 350 217 451 388 350 108 726 194 175 198 051 388 35035 388 351 388 351 194 176 388 351 Beginning in 2013 an additional tax of 3 8 applies to net investment income in excess of certain thresholds 20 Marginal tax rates and income brackets for 2013Marginal tax rate 21 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 8 925 0 17 850 0 8 925 0 12 75015 8 926 36 250 17 851 72 500 8 926 36 250 12 751 48 60025 36 251 87 850 72 501 146 400 36 251 73 200 48 601 125 45028 87 851 183 250 146 401 223 050 73 201 111 525 125 451 203 15033 183 251 398 350 223 051 398 350 111 526 199 175 203 151 398 35035 398 351 400 000 398 351 450 000 199 176 225 000 398 351 425 00039 6 400 001 450 001 225 001 425 001 Marginal tax rates and income brackets for 2014Marginal tax rate 22 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 075 0 18 150 0 9 075 0 12 95015 9 076 36 900 18 151 73 800 9 076 36 900 12 951 49 10025 36 901 89 350 73 801 148 850 36 901 74 425 49 101 127 55028 89 351 186 350 148 851 226 850 74 426 113 425 127 551 206 60033 186 351 405 100 226 851 405 100 113 426 202 550 206 601 405 10035 405 101 406 750 405 101 457 600 202 551 228 800 405 101 432 20039 6 406 751 457 601 228 801 432 201 Marginal tax rates and income brackets for 2015Marginal tax rate 23 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 225 0 18 450 0 9 225 0 13 15015 9 226 37 450 18 451 74 900 9 226 37 450 13 151 50 20025 37 451 90 750 74 901 151 200 37 451 75 600 50 201 129 60028 90 751 189 300 151 201 230 450 75 601 115 225 129 601 209 85033 189 301 411 500 230 451 411 500 115 226 205 750 209 851 411 50035 411 501 413 200 411 501 464 850 205 751 232 425 411 501 439 00039 6 413 201 464 851 232 426 439 001 Marginal tax rates and income brackets for 2016Marginal tax rate 24 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 275 0 18 550 0 9 275 0 13 25015 9 276 37 650 18 551 75 300 9 276 37 650 13 251 50 40025 37 651 91 150 75 301 151 900 37 651 75 950 50 401 130 15028 91 151 190 150 151 901 231 450 75 951 115 725 130 151 210 80033 190 151 413 350 231 451 413 350 115 726 206 675 210 801 413 35035 413 351 415 050 413 351 466 950 206 676 233 475 413 351 441 00039 6 415 051 466 951 233 476 441 001 Marginal tax rates and income brackets for 2017Marginal tax rate 25 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 325 0 18 650 0 9 325 0 13 35015 9 326 37 950 18 651 75 900 9 326 37 950 13 351 50 80025 37 951 91 900 75 901 153 100 37 951 76 550 50 801 131 20029 91 901 191 650 153 101 233 350 76 551 116 675 131 201 212 50033 191 651 416 700 233 351 416 700 116 676 208 350 212 501 416 70035 416 701 418 400 416 701 470 700 208 351 235 350 416 701 444 55039 6 418 401 470 701 235 351 444 501 Marginal tax rates and income brackets for 2018Marginal tax rate 26 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 525 0 19 050 0 9 525 0 13 60012 9 526 38 700 19 051 77 400 9 526 38 700 13 601 51 80022 38 701 82 500 77 401 165 000 38 701 82 500 51 801 82 50024 82 501 157 500 165 001 315 000 82 501 157 500 82 501 157 50032 157 501 200 000 315 001 400 000 157 501 200 000 157 501 200 00035 200 001 500 000 400 001 600 000 200 001 300 000 200 001 500 00037 500 001 600 001 300 001 500 001 Marginal tax rates and income brackets for 2019Marginal tax rate 27 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 700 0 19 400 0 9 700 0 13 85012 9 701 39 475 19 401 78 950 9 701 39 475 13 851 52 85022 39 476 84 200 78 951 168 400 39 476 84 200 52 851 84 20024 84 201 160 725 168 401 321 450 84 201 160 725 84 201 160 70032 160 726 204 100 321 451 408 200 160 726 204 100 160 701 204 10035 204 101 510 300 408 201 612 350 204 101 306 175 204 101 510 30037 510 301 612 351 306 176 510 301 Marginal tax rates and income brackets for 2020Marginal tax rate 28 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 875 0 19 750 0 9 875 0 14 10012 9 876 40 125 19 751 80 250 9 876 40 125 14 101 53 70022 40 126 85 525 80 251 171 050 40 126 85 525 53 701 85 50024 85 526 163 300 171 051 326 600 85 526 163 300 85 501 163 30032 163 301 207 350 326 601 414 700 163 301 207 350 163 301 207 35035 207 351 518 400 414 701 622 350 207 351 311 175 207 351 518 40037 518 401 622 051 311 176 518 401 Marginal tax rates and income brackets for 2021Marginal tax rate 29 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 9 950 0 19 900 0 9 950 0 14 20012 9 951 40 525 19 901 81 050 9 951 40 525 14 201 54 20022 40 526 86 375 81 051 172 750 40 526 86 375 54 201 86 35024 86 376 164 925 172 751 329 850 85 526 164 925 86 351 164 90032 164 926 209 425 329 851 418 850 163 301 209 425 164 901 209 40035 209 426 523 600 418 851 628 300 209 426 314 150 209 401 523 60037 523 601 628 301 314 151 523 601 Marginal tax rates and income brackets for 2022Marginal tax rate 30 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Head of household taxable income10 0 10 275 0 20 550 0 10 275 0 14 65012 10 276 41 775 20 551 83 550 10 276 41 775 14 651 55 90022 41 776 89 075 83 551 178 150 41 776 89 075 55 901 89 05024 89 076 170 050 178 151 340 100 89 076 170 050 89 051 170 05032 170 051 215 950 340 101 431 900 170 051 215 950 170 051 215 95035 215 951 539 900 431 901 647 850 215 951 323 925 215 951 539 90037 539 901 647 851 323 926 539 901 Marginal tax rates and income brackets for 2023Marginal tax rate 31 Single taxable income Married filing jointly or qualified widow er taxable income Married filing separately taxable income Not yet updated with 2023 data Head of household taxable income10 0 11 000 0 22 000 0 10 275 0 15 70012 11 000 44 725 22 000 89 450 10 276 41 775 15 700 59 85022 44 725 95 375 89 450 190 750 41 776 89 075 59 850 95 35024 95 375 182 100 190 750 364 200 89 076 170 050 95 350 182 10032 182 100 231 250 364 200 462 500 170 051 215 950 182 100 231 25035 231 250 578 125 462 500 693 750 215 951 323 925 231 250 578 10037 578 125 693 750 323 926 578 100 An individual pays tax at a given bracket only for each dollar within that tax bracket s range The top marginal rate does not apply in certain years to certain types of income Significantly lower rates apply after 2003 to capital gains and qualifying dividends see below Example of a tax computation Edit Income tax for year 2017 Single taxpayer making 40 000 gross income no children under 65 and not blind taking standard deduction 40 000 gross income 6 350 standard deduction 4 050 personal exemption 29 600 taxable income amount in the first income bracket 9 325 taxation of the amount in the first income bracket 9 325 10 932 50 amount in the second income bracket 29 600 9 325 20 275 00 taxation of the amount in the second income bracket 20 275 00 15 3 041 25 Total income tax is 932 50 3 041 25 3 973 75 9 93 effective tax Note however that taxpayers with taxable income of less than 100 000 must use IRS provided tax tables Under that table for 2016 the income tax in the above example would be 3 980 00 32 In addition to income tax a wage earner would also have to pay Federal Insurance Contributions Act tax FICA and an equal amount of FICA tax must be paid by the employer 40 000 adjusted gross income 40 000 6 2 33 2 480 Social Security portion 40 000 1 45 580 Medicare portion Total FICA tax paid by employee 3 060 7 65 of income Total federal tax of individual 3 973 75 3 060 00 7 033 75 17 58 of income Total federal tax including employer s contribution Total FICA tax contributed by employer 3 060 7 65 of income Total federal tax of individual including employer s contribution 3 973 75 3 060 00 3 060 00 10 093 75 25 23 of income Further information Rate schedule federal income tax Effective income tax rates Edit Effective tax rates are typically lower than marginal rates due to various deductions with some people actually having a negative liability The individual income tax rates in the following chart include capital gains taxes which have different marginal rates than regular income 15 34 Only the first 118 500 of someone s income is subject to social insurance Social Security taxes in 2016 The table below also does not reflect changes effective with 2013 law which increased the average tax paid by the top 1 to the highest levels since 1979 at an effective rate of 33 while most other taxpayers have remained near the lowest levels since 1979 35 Effective federal tax rates and average incomes for 2010 15 Quintile Average income before taxes Effective individual income tax rate Effective payroll tax rate Combined effective income and payroll tax rate Total effective federal tax rate includes corporate income and excise taxes Lowest 24 100 9 2 8 4 0 8 1 5 Second 44 200 2 3 7 8 5 5 7 2 Middle 65 400 1 6 8 3 9 9 11 5 Fourth 95 500 5 0 9 0 14 0 15 6 Highest 239 100 13 8 6 7 20 5 24 0 81st to 90th percentiles 134 600 8 1 9 4 17 5 19 3 91st to 95th percentiles 181 600 10 7 8 9 19 6 21 6 96th to 99th percentiles 286 400 15 1 7 1 22 2 24 9 Top 1 1 434 900 20 1 2 2 22 3 29 4 Taxable income EditIncome tax is imposed as a tax rate times taxable income Taxable income is defined as gross income less allowable deductions Taxable income as determined for federal tax purposes may be modified for state tax Gross income Edit Main article Gross income The Internal Revenue Code states that gross income means all income from whatever source derived and gives specific examples 36 Gross income is not limited to cash received but includes income realized in any form whether money property or services 37 Gross income includes wages and tips fees for performing services gain from sale of inventory or other property interest dividends rents royalties pensions alimony and many other types of income 36 Items must be included in income when received or accrued The amount included is the amount the taxpayer is entitled to receive Gains on property are the gross proceeds less amounts returned cost of goods sold or tax basis of property sold Certain types of income are exempt from income tax Among the more common types of exempt income are interest on municipal bonds a portion of Social Security benefits life insurance proceeds gifts or inheritances and the value of many employee benefits Gross income is reduced by adjustments and deductions Among the more common adjustments are reductions for alimony paid and IRA and certain other retirement plan contributions Adjusted gross income is used in calculations relating to various deductions credits phase outs and penalties Business deductions Edit Main article Tax deduction Most business deductions are allowed regardless of the form in which the business is conducted 38 Therefore an individual small business owner is allowed most of the same business deductions as a publicly traded corporation A business is an activity conducted regularly to make a profit Only a few business related deductions are unique to a particular form of business doing The deduction of investment expenses by individuals however has several limitations along with other itemized personal deductions 39 The amount and timing of deductions for income tax purposes is determined under tax accounting rules not financial accounting ones Tax rules are based on principles similar in many ways to accounting rules but there are significant differences Federal deductions for most meals and entertainment costs are limited to 50 of the costs with an exception for tax year 2021 allowing a 100 deduction for meals purchased in a restaurant Costs of starting a business sometimes called pre operating costs are deductible ratably over 60 months Deductions for lobbying and political expenses are limited Some other limitations apply Expenses likely to produce future benefits must be capitalized 40 The capitalized costs are then deductible as depreciation see MACRS or amortization over the period future benefits are expected 41 Examples include costs of machinery and equipment and costs of making or building property IRS tables specify lives of assets by class of asset or industry in which used When an asset the cost of which was capitalized is sold exchanged or abandoned the proceeds if any are reduced by the remaining unrecovered cost to determine gain or loss That gain or loss may be ordinary as in the case of inventory or capital as in the case of stocks and bonds or a combination for some buildings and equipment 42 Most personal living and family expenses are not deductible Business deductions allowed for federal income tax are almost always allowed in determining state income tax Only some states however allow itemized deductions for individuals Some states also limit deductions by corporations for investment related expenses Many states allow different amounts for depreciation deductions State limitations on deductions may differ significantly from federal limitations Business deductions in excess of business income result in losses that may offset other income However deductions for losses from passive activities may be deferred to the extent they exceed income from other passive activities 43 Passive activities include most rental activities except for real estate professionals and business activities in which the taxpayer does not materially participate In addition losses may not in most cases be deducted in excess of the taxpayer s amount at risk generally tax basis in the entity plus share of debt Personal deductions Edit Prior to 2018 individuals were allowed a special deduction called a personal exemption This was not allowed after 2017 but will be allowed again in 2026 This was a fixed amount allowed each taxpayer plus an additional fixed amount for each child or other dependents the taxpayer supports The amount of this deduction was 4 000 for 2015 The amount is indexed annually for inflation The amount of exemption was phased out at higher incomes through 2009 and after 2012 no phase out in 2010 2012 44 Citizens and individuals with U S tax residence may deduct a flat amount as a standard deduction This was 12 550 for single individuals and 25 100 for married individuals filing a joint return for 2021 Alternatively individuals may claim itemized deductions for actual amounts incurred for specific categories of nonbusiness expenses 45 Expenses incurred to produce tax exempt income and several other items are not deductible 46 Home owners may deduct the amount of interest and property taxes paid on their principal and second homes Local and state income taxes are deductible through the SALT deduction although this deduction is currently limited to 10 000 47 Contributions to charitable organizations are deductible by individuals and corporations but the deduction is limited to 50 and 10 of gross income respectively Medical expenses in excess of 10 of adjusted gross income are deductible as are uninsured casualty losses Other income producing expenses in excess of 2 of adjusted gross income are also deductible Before 2010 the allowance of itemized deductions was phased out at higher incomes The phase out expired for 2010 48 Retirement savings and fringe benefit plans Edit Employers get a deduction for amounts contributed to a qualified employee retirement plan or benefit plan The employee does not recognize income with respect to the plan until he or she receives a distribution from the plan The plan itself is organized as a trust and is considered a separate entity For the plan to qualify for tax exemption and for the employer to get a deduction the plan must meet minimum participation vesting funding and operational standards Examples of qualified plans include Pension plans defined benefit pension plan Profit sharing plans defined contribution plan Employee Stock Ownership Plan ESOPs Stock purchase plans Health insurance plans Employee benefit plans Cafeteria plans Employees or former employees are generally taxed on distributions from retirement or stock plans Employees are not taxed on distributions from health insurance plans to pay for medical expenses Cafeteria plans allow employees to choose among benefits like choosing food in a cafeteria and distributions to pay those expenses are not taxable In addition individuals may make contributions to Individual Retirement Accounts IRAs Those not currently covered by other retirement plans may claim a deduction for contributions to certain types of IRAs Income earned within an IRA is not taxed until the individual withdraws it Capital gains Edit Main article Capital gains tax in the United States Taxable income includes capital gains However individuals are taxed at a lower rate on long term capital gains and qualified dividends see below A capital gain is the excess of the sales price over the tax basis usually the cost of capital assets generally those assets not held for sale to customers in the ordinary course of business Capital losses where basis is more than sales price are deductible but deduction for long term capital losses is limited to the total capital gains for the year plus for individuals up to 3 000 of ordinary income 1 500 if married filing separately An individual may exclude 250 000 500 000 for a married couple filing jointly of capital gains on the sale of the individual s primary residence subject to certain conditions and limitations 49 Gains on depreciable property used in a business are treated as ordinary income to the extent of depreciation previously claimed 50 In determining gain it is necessary to determine which property is sold and the amount of basis of that property This may require identification conventions such as first in first out for identical properties like shares of stock Further tax basis must be allocated among properties purchased together unless they are sold together Original basis usually cost paid for the asset is reduced by deductions for depreciation or loss Certain capital gains are deferred that is they are taxed at a time later than the year of disposition Gains on property sold for installment payments may be recognized as those payments are received Gains on real property exchanged for like kind property are not recognized and the tax basis of the new property is based on the tax basis of the old property Before 1986 and from 2004 onward individuals were subject to a reduced rate of federal tax on capital gains called long term capital gains on certain property held more than 12 months The reduced rate of 15 applied for regular tax and the Alternative Minimum Tax through 2011 The reduced rate also applies to dividends from corporations organized in the United States or a country with which the United States has an income tax treaty This 15 rate was increased to 20 in 2012 Beginning in 2013 capital gains above certain thresholds is included in net investment income subject to an additional 3 8 tax 51 Ordinary income rate Long term capital gain rate Short term capital gain rate Recapture of depreciation on long term gain of real estate Long term gain on collectibles Long term gain on certain small business stock10 0 10 10 10 10 15 0 15 15 15 15 25 15 25 25 25 25 28 15 28 25 28 28 33 15 33 25 28 28 35 20 35 25 28 28 37 20 37 25 28 28 Capital gains up to 250 000 500 000 if filed jointly on real estate used as primary residence are exemptAccounting periods and methods Edit The US tax system allows individuals and entities to choose their tax year Most individuals choose the calendar year There are restrictions on choice of tax year for some closely held entities Taxpayers may change their tax year in certain circumstances and such change may require IRS approval Taxpayers must determine their taxable income based on their method of accounting for the particular activity Most individuals use the cash method for all activities Under this method income is recognized when received and deductions taken when paid Taxpayers may choose or be required to use the accrual method for some activities Under this method income is recognized when the right to receive it arises and deductions are taken when the liability to pay arises and the amount can be reasonably determined Taxpayers recognizing cost of goods sold on inventory must use the accrual method with respect to sales and costs of the inventory Methods of accounting may differ for financial reporting and tax purposes Specific methods are specified for certain types of income or expenses Gain on sale of property other than inventory may be recognized at the time of sale or over the period in which installment sale payments are received Income from long term contracts must be recognized ratably over the term of the contract not just at completion Other special rules also apply 52 Other taxable and tax exempt entities EditThis section needs additional citations for verification Please help improve this article by adding citations to reliable sources in this section Unsourced material may be challenged and removed August 2020 Learn how and when to remove this template message Partnerships and LLCs Edit Business entities treated as partnerships are not subject to income tax at the entity level Instead their members include their share of income deductions and credits in computing their own tax 53 The character of the partner s share of income such as capital gains is determined at the partnership level Many types of business entities including limited liability companies LLCs may elect to be treated as a corporation or as a partnership Distributions from partnerships are not taxed as dividends Corporations Edit Main article Corporate tax in the United States The U S federal effective corporate tax rate has become much lower than the nominal rate because of various special tax provisions Corporate tax is imposed in the U S at the federal most state and some local levels on the income of entities treated for tax purposes as corporations 54 A corporation wholly owned by U S citizens and resident individuals may elect for the corporation to be taxed similarly to partnerships as an S Corporation Corporate income tax is based on taxable income which is defined similarly to individual taxable income Shareholders including other corporations of corporations other than S Corporations are taxed on dividend distributions from the corporation They are also subject to tax on capital gains upon sale or exchange of their shares for money or property However certain exchanges such as in reorganizations are not taxable Multiple corporations may file a consolidated return at the federal and some state levels with their common parent Corporate tax rates Edit Federal corporate income tax is imposed at 21 from 2018 Dividend exclusions and certain corporation only deductions may significantly lower the effective rate Deductions for corporations Edit Most expenses of corporations are deductible subject to limitations also applicable to other taxpayers See relevant deductions for details In addition regular U S corporations are allowed a deduction of 100 of dividends received from 10 or more foreign subsidiaries 50 of amounts included in income under section 951A and 37 5 of foreign branch income Some deductions of corporations are limited at federal or state levels Limitations apply to items due to related parties including interest and royalty expenses Estates and trusts Edit Estates and trusts may be subject to income tax at the estate or trust level or the beneficiaries may be subject to income tax on their share of income Where income must be distributed the beneficiaries are taxed similarly to partners in a partnership Where income may be retained the estate or trust is taxed It may get a deduction for later distributions of income Estates and trusts are allowed only those deductions related to producing income plus 1 000 They are taxed at graduated rates that increase rapidly to the maximum rate for individuals The tax rate for trust and estate income in excess of 11 500 was 35 for 2009 Estates and trusts are eligible for the reduced rate of tax on dividends and capital gains through 2011 Tax exempt entities Edit Main article Tax exemption U S tax law exempts certain types of entities from income and some other taxes These provisions arose during the late 19th century Charitable organizations and cooperatives may apply to the IRS for tax exemption Exempt organizations are still taxed on any business income An organization which participates in lobbying political campaigning or certain other activities may lose its exempt status Special taxes apply to prohibited transactions and activities of tax exempt entities Social insurance taxes Social Security tax and Medicare tax or FICA EditMain article Federal Insurance Contributions Act tax The United States social insurance system is funded by a tax similar to an income tax Social Security tax of 6 2 is imposed on wages paid to employees The tax is imposed on both the employer and the employee The maximum amount of wages subject to the tax for 2020 was 137 700 55 This amount is indexed for inflation A companion Medicare Tax of 1 45 of wages is imposed on employers and employees with no limitation A self employment tax composed of both the employer and employee amounts totaling 15 3 is imposed on self employed persons Other tax items EditCredits Edit Main article Tax credits The federal and state systems offer numerous tax credits for individuals and businesses Among the key federal credits for individuals are Child credit For 2017 a credit up to 1 000 per qualifying child For 2018 to 2025 the credit rose to 2 000 per qualifying child but made having a Social Security Number SSN a condition of eligibility for each child For 2021 the credit was temporarily raised to 3 000 per child aged 6 to 17 and 3 600 per qualifying child aged 0 to 5 and was made fully refundable Child and dependent care credit a credit up to 6 000 phased out at incomes above 15 000 For 2021 the credit was raised up to 16 000 phased out at 125 000 56 Earned Income Tax Credit this refundable credit is granted for a percentage of income earned by a low income individual The credit is calculated and capped based on the number of qualifying children if any This credit is indexed for inflation and phased out for incomes above a certain amount For 2015 the maximum credit was 6 422 57 Credit for the elderly and disabled A nonrefundable credit up to 1 125 Two mutually exclusive credits for college expenses Businesses are also eligible for several credits These credits are available to individuals and corporations and can be taken by partners in business partnerships Among the federal credits included in a general business credit are Credit for increasing research expenses Work Incentive Credit or credit for hiring people in certain enterprise zones or on welfare A variety of industry specific credits In addition a federal foreign tax credit is allowed for foreign income taxes paid This credit is limited to the portion of federal income tax arising due to foreign source income The credit is available to all taxpayers Business credits and the foreign tax credit may be offset taxes in other years States and some localities offer a variety of credits that vary by jurisdiction States typically grant a credit to resident individuals for income taxes paid to other states generally limited in proportion to income taxed in the other state s Alternative minimum tax Edit Main article Alternative Minimum Tax Taxpayers must pay the higher of the regular income tax or the alternative minimum tax AMT Taxpayers who have paid AMT in prior years may claim a credit against regular tax for the prior AMT The credit is limited so that regular tax is not reduced below current year AMT AMT is imposed at a nearly flat rate 20 for corporations 26 or 28 for individuals estates and trusts on taxable income as modified for AMT Key differences between regular taxable income and AMT taxable income include The standard deduction and personal exemptions are replaced by a single deduction which is phased out at higher income levels No deduction is allowed for individuals for state taxes Most miscellaneous itemized deductions are not allowed for individuals Depreciation deductions are computed differently and Corporations must make a complex adjustment to more closely reflect economic income Special taxes Edit There are many federal tax rules designed to prevent people from abusing the tax system Provisions related to these taxes are often complex Such rules include Accumulated earnings tax on corporation accumulations in excess of business needs Personal holding company taxes Passive foreign investment company rules and Controlled foreign corporation provisions Special industries Edit Tax rules recognize that some types of businesses do not earn income in the traditional manner and thus require special provisions For example insurance companies must ultimately pay claims to some policy holders from the amounts received as premiums These claims may happen years after the premium payment Computing the future amount of claims requires actuarial estimates until claims are actually paid Thus recognizing premium income as received and claims expenses as paid would seriously distort an insurance company s income Special rules apply to some or all items in the following industries Insurance companies rules related to recognition of income and expense different rules apply to life insurance and to property and casualty insurance Shipping rules related to the revenue recognition cycle Extractive industries rules related to expenses for exploration and development and for recovery of capitalized costs In addition mutual funds regulated investment companies are subject to special rules allowing them to be taxed only at the owner level The company must report to each owner his her share of ordinary income capital gains and creditable foreign taxes The owners then include these items in their own tax calculation The fund itself is not taxed and distributions are treated as a return of capital to the owners Similar rules apply to real estate investment trusts and real estate mortgage investment conduits State local and territorial income taxes EditMain article State income tax Top Marginal State Income Tax Withholding Rates 2022 Income tax is also levied by most U S states and many localities on individuals corporations estates and trusts These taxes are in addition to federal income tax and are deductible for federal tax purposes State and local income tax rates vary from zero to 16 of taxable income 58 Some state and local income tax rates are flat single rate and some are graduated State and local definitions of what income is taxable vary highly Some states incorporate the federal definitions by reference Taxable income is defined separately and differently for individuals and corporations in some jurisdictions Some states impose alternative or additional taxes based on a second measure of income or capital States and localities tend to tax all income of residents States and localities only tax nonresidents on income allocated or apportioned to the jurisdiction Generally nonresident individuals are taxed on wages earned in the state based on the portion of days worked in the state Many states require partnerships to pay tax for nonresident partners Tax returns are filed separately for states and localities imposing income tax and may be due on dates that differ from federal due dates Some states permit related corporations to file combined or consolidated returns Most states and localities imposing income tax require estimated payments where tax exceeds certain thresholds and require withholding tax on payment of wages Puerto Rico also imposes its own taxation laws however unlike in the states only some residents there pay federal income taxes 59 though everyone must pay all other federal taxes Note 1 The other unincorporated territories of Guam American Samoa the Northern Mariana Islands and the Virgin Islands also impose their own income taxation laws under a mirror tax law based on federal income tax law International aspects Edit List of countries by tax revenue to GDP ratio See also International tax Foreign tax credit Foreign earned income exclusion and Foreign Account Tax Compliance Act The United States imposes tax on all citizens of the United States including those who are residents of other countries all individuals who are residents for tax purposes and domestic corporations defined as corporations created or organized in the United States or under Federal or state law Federal income tax is imposed on citizens residents and domestic corporations based on their worldwide income To mitigate double taxation a credit is allowed for foreign income taxes This foreign tax credit is limited to that part of current year tax attributable to foreign source income Determining such part involves determining the source of income and allocating and apportioning deductions to that income Many but not all tax resident individuals and corporations on their worldwide income but few allow a credit for foreign taxes In addition federal income tax may be imposed on non resident non citizens as well as foreign corporations on U S source income Federal tax applies to interest dividends royalties and certain other income of nonresident aliens and foreign corporations not effectively connected with a U S trade or business at a flat rate of 30 60 This rate is often reduced under tax treaties Foreign persons are taxed on income effectively connected with a U S business and gains on U S realty similarly to U S persons 61 Nonresident aliens who are present in the United States for a period of 183 days in a given year are subject to U S capital gains tax on certain net capital gains realized during that year from sources within the United States The states tax non resident individuals only on income earned within the state wages etc and tax individuals and corporations on business income apportioned to the state The United States has income tax treaties with over 65 countries These treaties reduce the chance of double taxation by allowing each country to fully tax its citizens and residents and reducing the amount the other country can tax them Generally the treaties provide for reduced rates of tax on investment income and limits as to which business income can be taxed The treaties each define which taxpayers can benefit from the treaty U S treaties do not apply to income taxes imposed by the states or political subdivisions except for the non discrimination provisions that appear in almost every treaty Also U S treaties generally do not permit U S persons from invoking treaty provisions with respect to U S taxes with certain relatively standard exceptions Tax collection and examinations EditTax returns Edit Individuals with income above a minimum level corporations partnerships estates and trusts must file annual reports called tax returns with federal 62 and appropriate state tax authorities These returns vary greatly in complexity level depending on the type of filer and complexity of their affairs On the return the taxpayer reports income and deductions calculates the amount of tax owed reports payments and credits and calculates the balance due Federal individual estate and trust income tax returns are due by April 15 63 for most taxpayers Corporate and partnership federal returns are due two and one half months following the corporation s year end Tax exempt entity returns are due four and one half months following the entity s year end All federal returns may be extended with most extensions available by merely filing a single page form Due dates and extension provisions for state and local income tax returns vary Income tax returns generally consist of the basic form with attached forms and schedules Several forms are available for individuals and corporations depending on the complexity and nature of the taxpayer s affairs Many individuals are able to use the one page Form 1040 EZ which requires no attachments except wage statements from employers Forms W 2 Individuals claiming itemized deductions must complete Schedule A Similar schedules apply for interest Schedule B dividends Schedule B business income Schedule C capital gains Schedule D farm income Schedule F and self employment tax Schedule SE All taxpayers must file those forms for credits depreciation AMT and other items that apply to them Electronic filing of tax returns may be done for taxpayers by registered tax preparers If a taxpayer discovers an error on a return or determines that tax for a year should be different the taxpayer should file an amended return These returns constitute claims for refund if taxes are determined to have been overpaid People filing tax forms in 1920 The IRS state and local tax authorities may examine a tax return and propose changes Changes to tax returns may be made with minimal advance involvement by taxpayers such as changes to wage or dividend income to correct errors Other examination of returns may require extensive taxpayer involvement such as an audit by the IRS These audits often require that taxpayers provide the IRS or other tax authority access to records of income and deductions Audits of businesses are usually conducted by IRS personnel at the business location Changes to returns are subject to appeal by the taxpayer including going to court IRS changes are often first issued as proposed adjustments The taxpayer may agree to the proposal or may advise the IRS why it disagrees Proposed adjustments are often resolved by the IRS and taxpayer agreeing to what the adjustment should be For those adjustments to which agreement is not reached the IRS issues a 30 day letter advising of the adjustment The taxpayer may appeal this preliminary assessment within 30 days within the IRS The Appeals Division reviews the IRS field team determination and taxpayer arguments and often proposes a solution that the IRS team and the taxpayer find acceptable When an agreement is still not reached the IRS issues an assessment as a notice of deficiency or 90 day letter The taxpayer then has three choices file suit in United States Tax Court without paying the tax pay the tax and sue for refund in regular court or simply pay the tax and be done Recourse to court can be costly and time consuming but is often successful IRS computers routinely make adjustments to correct mechanical errors in returns In addition the IRS conducts an extensive document matching computer program that compares taxpayer amounts of wages interest dividends and other items to amounts reported by taxpayers These programs automatically issue 30 day letters advising of proposed changes Only a very small percentage of tax returns are actually examined These are selected by a combination of computer analysis of return information and random sampling The IRS has long maintained a program to identify patterns on returns most likely to require adjustment Procedures for examination by state and local authorities vary by jurisdiction Tax collection Edit Taxpayers are required to pay all taxes owed based on the self assessed tax returns as adjusted The IRS collection process may provide time payment plans that include interest and a penalty that is merely added interest Where taxpayers do not pay tax owed the IRS has strong means to enforce collection These include the ability to levy bank accounts and seize property Generally significant advance notice is given before levy or seizure However in certain rarely used jeopardy assessments the IRS may immediately seize money and property The IRS Collection Divisions are responsible for most collection activities Withholding of tax Edit Main article Tax withholding in the United States Persons paying wages or making certain payments to foreign persons are required to withhold income tax from such payments Income tax withholding on wages is based on declarations by employees and tables provided by the IRS Persons paying interest dividends royalties and certain other amounts to foreign persons must also withhold income tax at a flat rate of 30 This rate may be reduced by a tax treaty These withholding requirements also apply to non U S financial institutions Additional backup withholding provisions apply to some payments of interest or dividends to U S persons The amount of income tax withheld is treated as a payment of tax by the person receiving the payment on which tax was withheld Employers and employees must also pay Social Security tax the employee portion of which is also to be withheld from wages Withholding of income and Social Security taxes are often referred to as payroll tax Statute of limitations Edit The IRS is precluded from assessing additional tax after a certain period of time In the case of federal income tax this period is generally three years from the later of the due date of the original tax return or the date the original return was filed The IRS has an additional three more years to make changes if the taxpayer has substantially understated gross income The period under which the IRS may make changes is unlimited in the case of fraud or in the case of failure to file a return 64 Penalties Edit Main article IRS penalties Taxpayers who fail to file returns file late or file returns that are wrong may be subject to penalties These penalties vary based on the type of failure Some penalties are computed as interest some are fixed amounts and some are based on other measures Penalties for filing or paying late are generally based on the amount of tax that should have been paid and the degree of lateness Penalties for failures related to certain forms are fixed amounts and vary by form from very small to huge Intentional failures including tax fraud may result in criminal penalties These penalties may include jail time or forfeiture of property Criminal penalties are assessed in coordination with the United States Department of Justice History EditConstitutional Edit Main article United States income tax legal history See also Taxation history of the United States and Marginal tax rates in the United States history President Abraham Lincoln and the United States Congress introduced in 1861 the first personal income tax in the United States Article I Section 8 Clause 1 of the United States Constitution the Taxing and Spending Clause specifies Congress s power to impose Taxes Duties Imposts and Excises but Article I Section 8 requires that Duties Imposts and Excises shall be uniform throughout the United States 65 The Constitution specifically stated Congress method of imposing direct taxes by requiring Congress to distribute direct taxes in proportion to each state s population determined by adding to the whole Number of free Persons including those bound to Service for a Term of Years and excluding Indians not taxed three fifths of all other Persons It had been argued that head taxes and property taxes slaves could be taxed as either or both were likely to be abused and that they bore no relation to the activities in which the federal government had a legitimate interest The fourth clause of section 9 therefore specifies that No Capitation or other direct Tax shall be laid unless in Proportion to the Census or enumeration herein before directed to be taken Taxation was also the subject of Federalist No 33 penned secretly by the Federalist Alexander Hamilton under the pseudonym Publius In it he asserts that the wording of the Necessary and Proper clause should serve as guidelines for the legislation of laws regarding taxation The legislative branch is to be the judge but any abuse of those powers of judging can be overturned by the people whether as states or as a larger group The courts have generally held that direct taxes are limited to taxes on people variously called capitation poll tax or head tax and property 66 All other taxes are commonly referred to as indirect taxes because they tax an event rather than a person or property per se 67 What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax which can be arguably viewed either as a direct or an indirect tax Early federal income taxes Edit The first income tax suggested in the United States was during the War of 1812 The idea for the tax was based on the British Tax Act of 1798 The British tax law applied progressive rates to income The British tax rates ranged from 0 833 on income starting at 60 to 10 on income above 200 The tax proposal was developed in 1814 Because the Treaty of Ghent was signed in 1815 ending hostilities and the need for additional revenue the tax was never imposed in the United States 68 In order to help pay for its war effort in the American Civil War Congress imposed the first federal income tax in U S history through passage of the Revenue Act of 1861 69 The act created a flat tax of three percent on incomes above 800 which was 5 6 times the 1861 nominal gross domestic product per capita of 144 31 the corresponding income in 2021 is 384K This taxation of income reflected the increasing amount of wealth held in stocks and bonds rather than property which the federal government had taxed in the past 70 The Revenue Act of 1862 established the first national inheritance tax and added a progressive taxation structure to the federal income tax implementing a tax of five percent on incomes above 10 000 71 Congress later further raised taxes and by the end of the war the income tax constituted about one fifth of the revenue of the federal government To collect these taxes Congress created the Office of the Commissioner of Internal Revenue within the Treasury Department 72 The federal income tax would remain in effect until its repeal in 1872 73 In 1894 Democrats in Congress passed the Wilson Gorman tariff which imposed the first peacetime income tax The rate was 2 on income over 4 000 which meant fewer than 10 of households would pay any The purpose of the income tax was to make up for revenue that would be lost by tariff reductions 74 In 1895 the United States Supreme Court in its ruling in Pollock v Farmers Loan amp Trust Co held a tax based on receipts from the use of property to be unconstitutional The Court held that taxes on rents from real estate on interest income from personal property and other income from personal property which includes dividend income were treated as direct taxes on property and therefore had to be apportioned divided among the states based on their populations Since apportionment of income taxes is impractical this had the effect of prohibiting a federal tax on income from property However the Court affirmed that the Constitution did not deny Congress the power to impose a tax on real and personal property and it affirmed that such would be a direct tax 75 Due to the political difficulties of taxing individual wages without taxing income from property a federal income tax was impractical from the time of the Pollock decision until the time of ratification of the Sixteenth Amendment below Progressive Era Edit For several years the issue of an income tax lay unaddressed In 1906 President Theodore Roosevelt revived the idea in his Sixth Annual Message to Congress 76 77 78 He said There is every reason why when next our system of taxation is revised the National Government should impose a graduated inheritance tax and if possible a graduated income tax During the speech he cited the Pollock case without naming it specifically 79 76 The income tax became an issue again in Roosevelt s later speeches including the 1907 State of the Union 80 and during the 1912 election campaign 81 Roosevelt s successor William Howard Taft also took up the issue of the income tax Like Roosevelt Taft cited the Pollock decision 82 and gave a major speech in June 1909 regarding the Income Tax 83 One month later Congress passed the resolution that would become the 16th Amendment 84 Ratification of the Sixteenth Amendment Edit Main article Sixteenth Amendment to the United States Constitution Amendment XVI in the National Archives In response 83 Congress proposed the Sixteenth Amendment ratified by the requisite number of states in 1913 85 which states The Congress shall have power to lay and collect taxes on incomes from whatever source derived without apportionment among the several States and without regard to any census or enumeration The Supreme Court in Brushaber v Union Pacific Railroad 240 U S 1 1916 indicated that the amendment did not expand the federal government s existing power to tax income meaning profit or gain from any source but rather removed the possibility of classifying an income tax as a direct tax on the basis of the source of the income The Amendment removed the need for the income tax to be apportioned among the states on the basis of population Income taxes are required however to abide by the law of geographical uniformity Some tax protesters and others opposed to income taxes cite what they contend is evidence that the Sixteenth Amendment was never properly ratified based in large part on materials sold by William J Benson In December 2007 Benson s Defense Reliance Package containing his non ratification argument which he offered for sale on the Internet was ruled by a federal court to be a fraud perpetrated by Benson that had caused needless confusion and a waste of the customers and the IRS time and resources 86 The court stated Benson has failed to point to evidence that would create a genuinely disputed fact regarding whether the Sixteenth Amendment was properly ratified or whether United States Citizens are legally obligated to pay federal taxes 87 See also Tax protester Sixteenth Amendment arguments Modern interpretation of the power to tax incomes Edit The modern interpretation of the Sixteenth Amendment taxation power can be found in Commissioner v Glenshaw Glass Co 348 U S 426 1955 In that case a taxpayer had received an award of punitive damages from a competitor for antitrust violations and sought to avoid paying taxes on that award The Court observed that Congress in imposing the income tax had defined gross income under the Internal Revenue Code of 1939 to include gains profits and income derived from salaries wages or compensation for personal service of whatever kind and in whatever form paid or from professions vocations trades businesses commerce or sales or dealings in property whether real or personal growing out of the ownership or use of or interest in such property also from interest rent dividends securities or the transaction of any business carried on for gain or profit or gains or profits and income derived from any source whatever 88 p 429 Note The Glenshaw Glass case was an interpretation of the definition of gross income in section 22 of the Internal Revenue Code of 1939 The successor to section 22 of the 1939 Code is section 61 of the current Internal Revenue Code of 1986 as amended The Court held that this language was used by Congress to exert in this field the full measure of its taxing power id and that the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted 88 p 430 The Court then enunciated what is now understood by Congress and the Courts to be the definition of taxable income instances of undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion Id at 431 The defendant in that case suggested that a 1954 rewording of the tax code had limited the income that could be taxed a position which the Court rejected stating The definition of gross income has been simplified but no effect upon its present broad scope was intended Certainly punitive damages cannot reasonably be classified as gifts nor do they come under any other exemption provision in the Code We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income 88 pp 432 33 Tax statutes passed after the ratification of the Sixteenth Amendment in 1913 are sometimes referred to as the modern tax statutes Hundreds of Congressional acts have been passed since 1913 as well as several codifications i e topical reorganizations of the statutes see Codification In Central Illinois Public Service Co v United States 435 U S 21 1978 the U S Supreme Court confirmed that wages and income are not identical as far as taxes on income are concerned because income not only includes wages but any other gains as well The Court in that case noted that in enacting taxation legislation Congress chose not to return to the inclusive language of the Tariff Act of 1913 but specifically in the interest of simplicity and ease of administration confined the obligation to withhold income taxes to salaries wages and other forms of compensation for personal services and that committee reports stated consistently that wages meant remuneration if paid for services performed by an employee for his employer 88 p 27 Other courts have noted this distinction in upholding the taxation not only of wages but also of personal gain derived from other sources recognizing some limitation to the reach of income taxation For example in Conner v United States 303 F Supp 1187 S D Tex 1969 aff d in part and rev d in part 439 F 2d 974 5th Cir 1971 a couple had lost their home to a fire and had received compensation for their loss from the insurance company partly in the form of hotel costs reimbursed The court acknowledged the authority of the IRS to assess taxes on all forms of payment but did not permit taxation on the compensation provided by the insurance company because unlike a wage or a sale of goods at a profit this was not a gain As the Court noted Congress has taxed income not compensation By contrast other courts have interpreted the Constitution as providing even broader taxation powers for Congress In Murphy v IRS the United States Court of Appeals for the District of Columbia Circuit upheld the federal income tax imposed on a monetary settlement recovery that the same court had previously indicated was not income stating a lthough the Congress cannot make a thing income which is not so in fact it can label a thing income and tax it so long as it acts within its constitutional authority which includes not only the Sixteenth Amendment but also Article I Sections 8 and 9 89 Similarly in Penn Mutual Indemnity Co v Commissioner the United States Court of Appeals for the Third Circuit indicated that Congress could properly impose the federal income tax on a receipt of money regardless of what that receipt of money is called It could well be argued that the tax involved here an income tax is an excise tax based upon the receipt of money by the taxpayer It certainly is not a tax on property and it certainly is not a capitation tax therefore it need not be apportioned Congress has the power to impose taxes generally and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful call it what you will 90 Income tax rates in history Edit History of top rates Edit Top marginal income tax rates Tax brackets Lowest marginal income tax rates US Capital Gains Taxes history In 1913 the top tax rate was 7 on incomes above 500 000 equivalent to 13 7 million 91 in 2021 dollars and a total of 28 3 million was collected 92 During World War I the top rate rose to 77 and the income threshold to be in this top bracket increased to 1 000 000 equivalent to 21 2 million 91 in 2021 dollars Under Treasury Secretary Andrew Mellon top tax rates were reduced in 1921 1924 1926 and 1928 Mellon argued that lower rates would spur economic growth 93 By 1928 the top rate was scaled down to 24 along with the income threshold for paying this rate lowered to 100 000 equivalent to 1 58 million 91 in 2021 dollars During the Great Depression and World War II the top income tax rate rose from pre war levels In 1939 the top rate was 75 applied to incomes above 5 000 000 equivalent to 97 4 million 91 in 2021 dollars During 1944 and 1945 the top rate was its all time high at 94 applied to income above 200 000 equivalent to 3 08 million 91 in 2021 dollars The highest marginal tax rate for individuals for U S federal income tax purposes for tax years 1952 and 1953 was 92 94 From 1964 to 2013 the threshold for paying top income tax rate has generally been between 200 000 and 400 000 unadjusted for inflation The one exception is the period from 1982 to 1992 when the topmost income tax brackets were removed From 1981 until 1986 the top marginal rate was lowered to 50 on 86 000 and up equivalent to 256 332 91 in 2021 dollars From 1988 to 1990 the threshold for paying the top rate was even lower with incomes above 29 750 equivalent to 68 164 91 in 2021 dollars paying the top rate of 28 in those years 95 96 Top tax rates were increased in 1992 and 1994 culminating in a 39 6 top individual rate applicable to all classes of income Top individual tax rates were lowered in 2004 to 35 and tax rates on dividends and capital gains lowered to 15 with the Bush administration claiming lower rates would spur economic growth Based on the summary of federal tax income data in 2009 with a tax rate of 35 the highest earning 1 of people paid 36 7 of the United States income tax revenue 97 In 2012 President Obama announced plans to raise the two top tax rates from 35 to 39 6 and from 33 to 36 98 History of income tax rates adjusted for inflation 1913 2018 99 100 Year Number of brackets First bracket Top bracket CommentRate Rate Income Adj 2021 91 101 1913 7 1 7 500 000 13 7 million First permanent income tax1916 14 2 15 2 000 000 49 8 million 1917 21 2 67 2 000 000 42 3 million World War I financing1918 56 6 77 1 000 000 18 million 1919 56 4 73 1 000 000 15 6 million 1922 50 4 58 200 000 3 24 million 1923 50 3 43 5 200 000 3 18 million 1924 43 1 5 46 500 000 7 91 million 1925 23 1 125 25 100 000 1 55 million Post war reductions1929 23 0 375 24 100 000 1 58 million 1930 23 1 125 25 100 000 1 62 million 1932 55 4 63 1 000 000 19 9 million Depression era1936 31 4 79 5 000 000 97 6 million 1940 31 4 4 81 1 5 000 000 96 7 million 1941 32 10 81 5 000 000 92 1 million World War II1942 24 19 88 200 000 3 32 million Revenue Act of 19421944 24 23 94 200 000 3 08 million Individual Income Tax Act of 19441946 24 19 86 45 200 000 2 78 million 1948 24 16 6 82 13 400 000 4 51 million 1950 24 17 4 84 36 400 000 4 51 million 1951 24 20 4 91 400 000 4 18 million 1952 26 22 2 92 400 000 4 08 million 1954 26 20 91 400 000 4 04 million 1964 26 16 77 400 000 3 49 million Tax reduction during Vietnam war1965 25 14 70 200 000 1 72 million 1968 33 14 75 25 200 000 1 56 million 1969 33 14 77 200 000 1 48 million 1970 33 14 71 75 200 000 1 4 million 1971 33 14 70 200 000 1 34 million 1981 17 13 825 69 125 215 400 642 021 Reagan era tax cuts1982 14 12 50 85 600 240 359 Reagan era tax cuts1983 14 11 50 109 400 297 643 1987 5 11 38 5 90 000 214 666 Reagan era tax cuts1988 2 15 28 29 750 68 164 Reagan era tax cuts1991 3 15 31 82 150 163 437 Omnibus Budget Reconciliation Act of 19901993 5 15 39 6 89 150 167 231 Omnibus Budget Reconciliation Act of 19932001 5 10 39 1 297 350 455 050 2002 6 10 38 6 307 050 462 592 2003 6 10 35 311 950 459 517 Bush tax cuts2013 7 10 39 6 400 000 465 314 American Taxpayer Relief Act of 20122018 7 10 37 500 000 510 thousand Tax Cuts and Jobs Act of 2017Federal income tax rates Edit Federal and state income tax rates have varied widely since 1913 For example in 1954 the federal income tax was based on layers of 24 income brackets at tax rates ranging from 20 to 91 for a chart see Internal Revenue Code of 1954 Below is a table of historical marginal income tax rates for married filing jointly tax payers at stated income levels These income numbers are not the amounts used in the tax laws at the time Historical income tax rates not adjusted for inflation 1913 2010 102 Year 10 001 20 001 60 001 100 001 250 0011913 1 2 3 5 6 1914 1 2 3 5 6 1916 2 3 5 7 10 1918 16 21 41 64 72 1920 12 17 37 60 68 1922 10 16 36 56 58 1924 7 11 27 43 44 1926 6 10 21 25 25 1928 6 10 21 25 25 1930 6 10 21 25 25 1932 10 16 36 56 58 1934 11 19 37 56 58 1936 11 19 39 62 68 1938 11 19 39 62 68 1940 14 28 51 62 68 1942 38 55 75 85 88 1944 41 59 81 92 94 1946 38 56 78 89 91 1948 38 56 78 89 91 1950 38 56 78 89 91 1952 42 62 80 90 92 1954 38 56 78 89 91 1956 26 38 62 75 89 1958 26 38 62 75 89 1960 26 38 62 75 89 1962 26 38 62 75 89 1964 23 34 56 66 76 1966 76 22 32 53 62 70 1980 18 24 54 59 70 1982 16 22 49 50 50 1984 14 18 42 45 50 1986 14 18 38 45 50 1988 15 15 28 28 28 1990 15 15 28 28 28 1992 15 15 28 28 31 1994 15 15 28 31 39 6 1996 15 15 28 31 36 1998 15 15 28 28 36 2000 15 15 28 28 36 2002 10 15 27 27 35 2004 10 15 25 25 33 2006 10 15 15 25 33 2008 10 15 15 25 33 2010 10 15 15 25 33 2012 10 15 15 25 39 6 Controversies EditThe complexity of the U S income tax laws Edit United States tax law attempts to define a comprehensive clarification needed system of measuring income in a complex economy Many provisions defining income or granting or removing benefits require significant definition of terms Further many state income tax laws do not conform with federal tax law in material respects These factors and others have resulted in substantial complexity Even venerable legal scholars like Judge Learned Hand have expressed amazement and frustration with the complexity of the U S income tax laws In the article Thomas Walter Swan 57 Yale Law Journal No 2 167 169 December 1947 Judge Hand wrote In my own case the words of such an act as the Income Tax merely dance before my eyes in a meaningless procession cross reference to cross reference exception upon exception couched in abstract terms that offer me no handle to seize hold of and that leave in my mind only a confused sense of some vitally important but successfully concealed purport which it is my duty to extract but which is within my power if at all only after the most inordinate expenditure of time I know that these monsters are the result of fabulous industry and ingenuity plugging up this hole and casting out that net against all possible evasion yet at times I cannot help recalling a saying of William James about certain passages of Hegel that they were no doubt written with a passion of rationality but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness Complexity is a separate issue from flatness of rate structures Also in the United States income tax laws are often used by legislatures as policy instruments for encouraging numerous undertakings deemed socially useful including the buying of life insurance the funding of employee health care and pensions the raising of children home ownership and the development of alternative energy sources and increased investment in conventional energy Special tax provisions granted for any purpose increase complexity irrespective of the system s flatness or lack thereof Proposals for changes of income taxation Edit Proposals have been made frequently to change tax laws often with the backing of specific interest groups Organizations making such proposals include Citizens for Tax Justice Americans for Tax Reform Americans for Tax Fairness Citizens for an Alternative Tax System Americans For Fair Taxation and FreedomWorks Various proposals have been put forth for tax simplification in Congress including the Fair Tax Act and various Flat tax plans Alternatives Edit Proponents of a consumption tax argue that the income tax system creates perverse incentives by encouraging taxpayers to spend rather than save a taxpayer is only taxed once on income spent immediately while any interest earned on saved income is itself taxed 103 To the extent that this is considered unjust it may be remedied in a variety of ways e g excluding investment income from taxable income making investments deductible and therefore only taxing them when gains are realized or replacing the income tax by other forms of tax such as a sales tax 104 Taxation vs the states Edit Some economists believe income taxation offers the federal government a technique to diminish the power of the states because the federal government is then able to distribute funding to states with conditions attached often giving the states no choice but to submit to federal demands 105 Tax protestors Edit Numerous tax protester arguments have been raised asserting that the federal income tax is unconstitutional including discredited claims that the Sixteenth Amendment was not properly ratified All such claims have been repeatedly rejected by the federal courts as frivolous 106 Distribution Edit Further information Progressivity in United States income tax Distribution of U S federal taxes for 2000 as a percentage of income among the family income quintiles CBO chart illustrating the percent reduction in income inequality due to federal taxes and income transfers from 1979 to 2011 107 In the United States a progressive tax system is employed which equates to higher income earners paying a larger percentage of their income in taxes According to the IRS the top 1 of income earners for 2008 paid 38 of income tax revenue while earning 20 of the income reported 108 The top 5 of income earners paid 59 of the total income tax revenue while earning 35 of the income reported 108 The top 10 paid 70 earning 46 and the top 25 paid 86 earning 67 The top 50 paid 97 earning 87 and leaving the bottom 50 paying 3 of the taxes collected and earning 13 of the income reported 108 From 1979 to 2007 the average federal income tax rate fell 110 for the second lowest quintile 56 for the middle quintile 39 for the fourth quintile 8 for the highest quintile and 15 for the top 1 with the bottom quintile moving from a tax rate of zero to negative liability Despite this individual income tax revenue only dropped from 8 7 to 8 5 of GDP over that time and total federal revenue was 18 5 of GDP in both 1979 and 2007 above the postwar average of 18 109 Tax code changes have dropped millions of lower earning people from the federal income tax rolls in recent decades Those with zero or negative liability who were not claimed as dependents by a payer increased from 14 8 of the population in 1984 to 49 5 in 2009 110 111 While there is consensus that overall federal taxation is progressive there is dispute over whether progressivity has increased or decreased in recent decades and by how much 112 113 The total effective federal tax rate for the top 0 01 of income earners declined from around 75 to around 35 between 1960 and 2005 112 Total effective federal tax rates fell from 19 1 to 12 5 for the three middle quintiles between 1979 and 2010 from 27 1 to 24 for the top quintile from 7 5 to 1 5 for the bottom quintile and from 35 1 to 29 4 for the top 1 114 A 2008 OECD study ranked 24 OECD nations by progressiveness of taxes and separately by progressiveness of cash transfers which include pensions unemployment and other benefits The United States had the highest concentration coefficient in income tax a measure of progressiveness before adjusting for income inequality The United States was not at the top of either measure for cash transfers Adjusting for income inequality Ireland had the highest concentration coefficient for income taxes In 2008 overall income tax rates for the US were below the OECD average 115 Effects on income inequality Edit Further information Income inequality in the United States According to the CBO U S federal tax policies substantially reduce income inequality measured after taxes Taxes became less progressive i e they reduced income inequality relatively less measured from 1979 to 2011 The tax policies of the mid 1980s were the least progressive period since 1979 Government transfer payments contributed more to reducing inequality than taxes 107 See also EditHistory of taxation in the United States Internal Revenue Code 212 tax deductibility of investment expenses Payroll taxes in the United States Tax Day Tax preparation Taxation of illegal income in the United StatesOther federal taxation Capital gains tax in the United States Corporate tax in the United StatesUS State taxes Sales taxes in the United States State income tax State tax levelsPolitics FairTax Tax protester United States General Taxation in the United States Federal tax revenue by stateExplanatory notes Edit Contrary to common misconception residents of Puerto Rico do pay U S federal taxes customs taxes which are subsequently returned to the Puerto Rico Treasury See Dept of the Interior Office of Insular Affairs DOI gov Archived 2012 06 10 at the Wayback Machine import export taxes See Stanford wellsphere com Archived 2010 04 01 at the Wayback Machine federal commodity taxes See Stanford wellsphere com social security taxes See IRS gov etc Residents pay federal payroll taxes such as Social Security See IRS gov and Medicare See Reuters com as well as Commonwealth of Puerto Rico income taxes See Puertorico herald org and HTRCPA com Archived April 29 2011 at the Wayback Machine All federal employees See Heritage org Archived 2010 02 10 at the Wayback Machine those who do business with the federal government See MCVPR com Archived May 15 2011 at the Wayback Machine Puerto Rico based corporations that intend to send funds to the U S See p 9 line 1 Archived September 3 2009 at the Wayback Machine and some others For example Puerto Rican residents that are members of the U S military See Heritage org and Puerto Rico residents who earned income from sources outside Puerto Rico See pp 14 15 also pay federal income taxes In addition because the cutoff point for income taxation is lower than that of the U S IRS code and because the per capita income in Puerto Rico is much lower than the average per capita income on the mainland more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island This occurs because the Commonwealth of Puerto Rico government has a wider set of responsibilities than do U S State and local governments See GAO gov As residents of Puerto Rico pay into Social Security Puerto Ricans are eligible for Social Security benefits upon retirement but are excluded from the Supplemental Security Income SSI Commonwealth of Puerto Rico residents unlike residents of the Commonwealth of the Northern Mariana Islands and residents of the 50 States do not receive the SSI See Socialsecurity gov and the island actually receives less than 15 of the Medicaid funding it would normally receive if it were a U S state However Medicare providers receive less than full state like reimbursements for services rendered to beneficiaries in Puerto Rico even though the latter paid fully into the system See p 252 Archived 2011 05 11 at the Wayback Machine In general many federal social welfare programs have been extended to Puerto Rican sic residents although usually with caps inferior to those allocated to the states The Louisiana Purchase and American Expansion 1803 1898 By Sanford Levinson and Bartholomew H Sparrow New York Rowman and Littlefield Publishers 2005 Page 167 For a comprehensive coverage of federal programs made extensive to Puerto Rico see Richard Cappalli s Federal Aid to Puerto Rico 1970 It has also been estimated See Egleforum org that because the population of the Island is greater than that of 50 of the States if it were a state Puerto Rico would have six to eight seats in the House in addition to the two seats in the Senate See Eagleforum org CRF USA org Archived 2009 06 10 at the Wayback Machine and Thomas gov Archived February 1 2016 at the Wayback Machine For the later the official U S Congress database website you will need to resubmit a query The document in question is called House Report 110 597 Puerto Rico Democracy Act of 2007 These are the steps to follow THOMAS gov Archived September 29 2006 at the Wayback Machine gt Committee Reports gt 110 gt drop down Word Phrase and pick Report Number gt type 597 next to Report Number This will provide the document House Report 110 597 2007 then from the Table of Contents choose Background and need for legislation Another misconception is that the import export taxes collected by the U S on products manufactured in Puerto Rico are all returned to the Puerto Rico Treasury This is not the case Such import export taxes are returned only for rum products and even then the US Treasury keeps a portion of those taxes See the House Report 110 597 Puerto Rico Democracy Act of 2007 mentioned above References Edit Samuel A Donaldson Federal Income Taxation of Individuals Cases Problems and Materials 4 2nd Ed 2007 a b Id See below for additional reading The U S Internal Revenue Service offers many free publications which are available online including one for individuals and one for corporations in both pdf and web formats An incomplete index is available by topic Many states offer similar publications Iowa Tax Fee Descriptions and Rates Iowa Department of Revenue Retrieved May 5 2023 a b CCH State Tax Handbook 2018 page 617 et seq Durante Alex October 18 2022 2023 Tax Brackets Tax Foundation Retrieved May 5 2023 CCH State Tax Handbook 2018 page 254 et seq eCFR Title 26 of the CFR Internal Revenue Code of Federal Regulations Retrieved May 5 2023 IRS instructions for Form 1120 Schedule M 3 Overview of the Federal Tax System as in Effect for 2022 Joint Committee on Taxation Retrieved May 5 2023 IRS Pub 502 PDF IRS Note limit is 7 5 for those over age 65 Questions and Answers for the Additional Medicare Tax Internal Revenue Service Retrieved July 6 2018 Chart C Other Situations When You Must File PDF IRS Retrieved September 30 2014 Income inequality Top 1 percent took record share of 2012 U S income Associated Press Sept 10 2013 a b c The Distribution of Household Income and Federal Taxes 2010 The US Congressional Budget Office CBO December 4 2013 Retrieved January 6 2014 It matters how tax brackets are adjusted Tax Foundation October 10 2014 Retrieved March 16 2016 IRS gov PDF irs gov Retrieved August 19 2018 Publication 505 2018 Tax Withholding and Estimated Tax Internal Revenue Service www irs gov Retrieved August 19 2018 IRS gov 2012 Tax Rate Tables PDF irs gov Retrieved August 19 2018 26 USC 1411 IRS Pub 17 2013 PDF irs gov Retrieved August 19 2018 IRS Pub 17 2014 PDF irs gov Retrieved August 19 2018 IRS Pub 17 2015 PDF irs gov Retrieved August 19 2018 IRS Rev Proc 15 53 PDF irs gov Retrieved August 19 2018 IRS Rev Proc 2016 55 PDF irs gov Retrieved August 19 2018 Individual Tax Reform What are the 2019 tax brackets for federal income taxes June 26 2019 2020 Tax Brackets November 14 2019 2021 Tax Brackets October 27 2020 2022 Tax Brackets November 10 2021 2023 Tax Brackets October 18 2022 IRS 1040 Instructions for 2016 Tax Tables page 81 Payroll Tax Cut to Boost Take Home Pay for Most Workers irs gov Retrieved August 19 2018 Effective Income Tax Rates The New York Times January 17 2012 The Distribution of Household Income and Federal Taxes 2011 Congressional Budget Office November 12 2014 Retrieved January 20 2015 a b 26 USC 61 26 CFR 1 61 1 a 26 USC 162 et seq IRS Publication 535 Business Expenses Fox chapter 22 Hoffman chapters 6 and 7 Pratt chapters 7 and 10 26 USC 263 26 USC 168 et seq IRS Publication 946 How to Depreciate Property Fox chapter 24 Hoffman chapter 8 Pratt chapter 9 26 USC 1011 et seq IRS Topic 409 Capital Gains and Losses Fox chapters 13 14 Hoffman chapters 13 14 Pratt chapters 14 17 26 USC 269 IRS Publication 925 Passive Activities Losses from an activity are deductible against other income on disposal of the activity 26 USC 151 26 USC 262 163 164 170 IRS Form 1040 Schedule A Fox chapter 21 Hoffman chapter 10 Pratt chapter 11 26 USC 265 et seq With new SALT limit IRS explains tax treatment of state and local tax refunds Internal Revenue Service www irs gov Retrieved February 8 2022 26 USC 68 26 USC 121 See generally 26 USC 1045 IRS Topic 409 Capital Gains and Losses and Publication 535 above Fox chapters 13 14 Hoffman chapters 13 14 Pratt chapters 16 17 Lowrey Annie January 4 2013 Tax Code May Be the Most Progressive Since 1979 The New York Times Retrieved January 6 2014 Fox chapter 32 Hoffman chapter 16 Pratt chapter 5 Partnerships Internal Revenue Service www irs gov Retrieved February 8 2022 Forming a Corporation Internal Revenue Service www irs gov Retrieved February 8 2022 Contribution and Benefit Base www ssa gov Retrieved July 23 2020 26 U S Code 21 Expenses for household and dependent care services necessary for gainful employment LII Legal Information Institute Retrieved February 8 2022 EITC Income Limits Maximum Credit Amounts Internal Revenue Service www irs gov Retrieved August 19 2018 See e g CCH 2013 State Tax Handbook ISBN 978 0 8080 3227 4 Fox Income Tax in the USA appendix ISBN 978 0 9851823 3 5 ASIN B00BCSNOGG All residents of PR pay federal taxes with the exception of federal income taxes which only some residents of Puerto Rico must still pay 26 USC 871 and 26 USC 881 26 USC 871 b 26 USC 881 and 26 USC 897 26 USC 6012 Publication 509 Tax Calendars for use in 2017 U S Internal Revenue Service Cat No 15013X IRS Can Audit for Three Years Six or Forever Here s How to Tell www americanbar org Retrieved February 8 2022 U S Constitution Article 1 Section 8 The U S Constitution Online USConstitution net usconstitution net Retrieved August 19 2018 Hylton v United States 3 U S 171 1796 Penn Mutual Indemnity Co v Commissioner 227 F 2d 16 19 20 3rd Cir 1960 Steward Machine Co v Davis 301 U S 548 1937 581 582 A History of Taxation Taxworld Archived from the original on January 20 2019 Retrieved December 7 2013 Joseph A Hill The Civil War Income Tax Quarterly Journal of Economics Vol 8 No 4 July 1894 pp 416 452 JSTOR 1885003 appendix JSTOR 1885007 Weisman 2002 pp 30 35 Weisman 2002 pp 40 42 Pollack Sheldon D 2014 The First National Income Tax 1861 1872 PDF Tax Lawyer 67 2 Weisman 2002 pp 99 101 Charles F Dunbar The New Income Tax Quarterly Journal of Economics Vol 9 No 1 Oct 1894 pp 26 46 JSTOR 1883633 Chief Justice Fuller s opinion 158 U S 601 634 Archived December 6 2008 at the Wayback Machine a b Origins of the Modern Income Tax 1894 1913 p 18 University of Delaware December 3 1906 Sixth Annual Message Munsey s Magazine Volume 46 Roosevelt said The first purely income tax law was past by the Congress in 1861 but the most important law dealing with the subject was that of 1894 This the court held to be unconstitutional The question is undoubtedly very intricate delicate and troublesome The decision of the court was only reached by one majority It is the law of the land and of course is accepted as such and loyally obeyed by all good citizens December 3 1907 Seventh Annual Message Theodore Roosevelt s Confession of Faith Before the Progressive National Convention William Howard Taft Jeffrey Rosen a b June 16 1909 Message Regarding Income Tax William Howard Taft The 16th Amendment and 100 years of Federal income taxes Library of Congress United States Government Printing Office at Amendments to the Constitution of the United States of America Archived 2008 02 05 at the Wayback Machine see generally United States v Thomas 788 F 2d 1250 7th Cir 1986 cert denied 107 S Ct 187 1986 Ficalora v Commissioner 751 F 2d 85 85 1 U S Tax Cas CCH 9103 2d Cir 1984 Sisk v Commissioner 791 F 2d 58 86 1 U S Tax Cas CCH 9433 6th Cir 1986 United States v Sitka 845 F 2d 43 88 1 U S Tax Cas CCH 9308 2d Cir cert denied 488 U S 827 1988 United States v Stahl 792 F 2d 1438 86 2 U S Tax Cas CCH 9518 9th Cir 1986 cert denied 107 S Ct 888 1987 Brown v Commissioner 53 T C M CCH 94 T C Memo 1987 78 CCH Dec 43 696 M 1987 Lysiak v Commissioner 816 F 2d 311 87 1 U S Tax Cas CCH 9296 7th Cir 1987 Miller v United States 868 F 2d 236 89 1 U S Tax Cas CCH 9184 7th Cir 1989 also see generally Boris I Bittker Constitutional Limits on the Taxing Power of the Federal Government The Tax Lawyer Fall 1987 Vol 41 No 1 p 3 American Bar Ass n Memorandum Opinion p 14 Dec 17 2007 docket entry 106 United States v Benson case no 1 04 cv 07403 United States District Court for the Northern District of Illinois Eastern Division Memorandum Opinion p 9 Dec 17 2007 docket entry 106 United States v Benson case no 1 04 cv 07403 United States District Court for the Northern District of Illinois Eastern Division a b c d 348 U S Opinion on rehearing July 3 2007 p 16 Murphy v Internal Revenue Service and United States case no 05 5139 United States Court of Appeals for the District of Columbia Circuit 2007 2 U S Tax Cas CCH 50 531 D C Cir 2007 Penn Mutual Indemnity Co v Commissioner 277 F 2d 16 60 1 U S Tax Cas CCH 9389 3d Cir 1960 footnotes omitted a b c d e f g h 1634 1699 McCusker J J 1997 How Much Is That in Real Money A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States Addenda et Corrigenda PDF American Antiquarian Society 1700 1799 McCusker J J 1992 How Much Is That in Real Money A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States PDF American Antiquarian Society 1800 present Federal Reserve Bank of Minneapolis Consumer Price Index estimate 1800 Retrieved April 16 2022 Distribution of the Income Tax The Independent July 20 1914 Retrieved August 23 2012 Tax History Project under year 1920 Page 12 of Instructions for 1952 Form 1040 Internal Revenue Service U S Department of the Treasury page 12 of Instructions for 1953 Form 1040 Internal Revenue Service U S Department of the Treasury History of Federal Individual Income Bottom and Top Bracket Rates Retrieved 2010 02 04 Guenther Gary February 12 2018 Individual Income Tax Rates and Other Key Elements of the Federal Individual Income Tax 1988 to 2017 PDF Washington D C Congressional Research Service Retrieved February 25 2018 Logan D S 24 October 2011 Summary of latest federal individual income tax data Tax Foundation Outline of Major Tax Law Provisions in 2013 under Multiple Scenarios 12 April 2012 Tax Foundation Personal Exemptions and Individual Income Tax Rates 1913 2002 Internal Revenue Service U S Federal Individual Marginal Income Tax Rates History 1913 2009 Archived 2013 01 16 at the Wayback Machine The Tax Foundation CPI Inflation Calculator U S Federal Individual Income Tax Rates History 1913 2011 Nominal and Inflation Adjusted Brackets Tax Foundation Accessed 10 November 2011 John Stuart Mill s argument reported by Marvin A Chirelstein Federal Income Taxation p 433 Foundation Press 10th Ed 2005 Chirelstein loc cit Cato Institute publication PDF cato org Archived from the original PDF on February 27 2012 Retrieved August 19 2018 The Truth About Frivolous Tax Arguments March 4 2013 Retrieved July 30 2013 a b The Distribution of Household Income and Federal Taxes 2011 Congressional Budget Office US Government November 2014 a b c McCormally Kevin December 18 2010 Where Do You Rank as a Taxpayer Kiplinger Retrieved June 18 2010 Reynolds Alan May 3 2011 The Increasing Progressivity of U S Taxes And the Shrinking Tax Base Cato Institute Retrieved January 18 2014 Bluey Rob February 19 2012 Chart of the Week Nearly Half of All Americans Don t Pay Income Taxes Heritage Foundation Retrieved October 28 2013 Will Freeland Scott A Hodge July 20 2012 Tax Equity and the Growth in Nonpayers Tax Foundation Retrieved October 28 2013 a b Thomas Piketty Emmanuel Saez 2007 How Progressive is the U S Federal Tax System A Historical and International Perspective PDF Journal of Economic Perspectives 21 1 23 24 doi 10 1257 jep 21 1 3 S2CID 5160267 Retrieved January 25 2014 Michael D Stroup Keith Hubbard August 2013 An improved index and estimation method for assessing tax progressivity PDF Mercatus Center George Mason University Retrieved January 18 2014 The Distribution of Household Income and Federal Taxes 2010 Congressional Budget Office December 4 2013 Retrieved January 21 2014 Growing Unequal Income Distribution and Poverty in OECD Countries OECD Publishing ISBN 978 92 64 04418 0 2008 pgs 103 104 Further reading EditGovernment sources IRS Publication 17 Your Federal Income Tax IRS Publication 334 Tax Guide for Small Business IRS Publication 509 Tax Calendar IRS Publication 541 Partnerships IRS Publication 542 Corporations IRS Publication 544 Sales and Other Dispositions of Assets IRS Publication 556 Examination of Returns Appeal Rights and Claims for Refund IRS Tax Topics IRS videos on tax topics IRS links to state websitesLaw amp regulations Federal tax law 26 USC Code of Federal Regulations 26 CFRTexts Fox Stephen C Income Tax in the USA 2013 edition ISBN 978 0 9851823 3 5 ASIN B00BCSNOGG Hoffman William H Jr Willis Eugene et al South Western Federal Taxation 2013 edition ISBN 978 1 133 18955 8 ASIN B00B6F3AWI Pratt James W Kulsrud William N et al Federal Taxation 2013 edition ISBN 978 1 133 49623 6 Whittenberg Gerald Altus Buller Martha Gill Stephen Income Tax Fundamentals 2010 2013 edition ISBN 978 1 111 97251 6 ASIN B00B6FBDHW History Buenker John D The Income Tax and the Progressive Era Routledge 2018 excerpt Ellis Elmer Public Opinion and the Income Tax 1860 1900 Mississippi Valley Historical Review 27 2 1940 225 242 online Ratner Sidney American Taxation Its History as a Social Force in Democracy 1942 onlineThorndike Joseph J Their Fair Share Taxing the Rich in the Age of FDR Washington DC Urban Institute 2013 Weisman Steven R 2002 The Great Tax Wars Lincoln to Wilson The Fierce Battles over Money That Transformed the Nation Simon amp Schuster ISBN 0 684 85068 0 Reference works annual CCH U S Master Tax Guide 2013 ISBN 978 0 8080 2980 9 RIA Federal Tax Handbook 2013 ISBN 978 0 7811 0472 2 Dauchy E P amp Balding C 2013 Federal Income Tax Revenue Volatility Since 1966 Working Papers w0198 Center for Economic and Financial Research CEFIR Available at SSRN 2351376 Consumer publications annual J K Lasser s Your Income Tax for 2013 ISBN 978 0 470 44711 6 ASIN B009WU0U2C Ernst amp Young Tax Guide 2013 ISBN 978 1 118 46667 4 ASIN B00A6WOSUK Retrieved from https en wikipedia org w index php title Income tax in the United States amp oldid 1153648465, wikipedia, wiki, book, books, library,

article

, read, download, free, free download, mp3, video, mp4, 3gp, jpg, jpeg, gif, png, picture, music, song, movie, book, game, games.