Income Taxes
| Author | Jeffrey Wilson |
| Pages | 1291-1296 |
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Income taxation has a long history in the United States. During the Civil War, President Lincoln and Congress created the commissioner of Internal Revenue and enacted an income tax to pay war expenses in 1862. This first income tax was repealed a decade later. In 1894, Congress attempted to revive the income tax, but the next year the Supreme Court ruled it unconstitutional.
The Sixteenth Amendment to the U.S. Constitution, ratified in 1916, authorized Congress to tax "incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." That same year, Congress introduced the first form 1040. It levied a 1 percent tax on net personal income above $3,000, and it placed a 6 percent surtax on incomes of more than $500,000. This top rate of income tax later rose as high as 77 percent as the United States looked for revenues to help finance the World War I effort. World War II ushered in legislation to mandate payroll withholding and quarterly tax payments.
After World War II, the IRS was reorganized to replace the patronage system with career, professional employees. As of 2002, only the top IRS official, the IRS commissioner, and the IRS's chief counsel are selected by the president and confirmed by the Senate.
The Internal Revenue Code (IRC) is contained in Title 26 of the United States Code (26 U.S.C.). This is the body of statutory law that governs federal income taxation. Congress created the Internal Revenue Service (IRS) to function as the nation's tax collection agency. It administers the IRC. The IRS is a branch of the Department of Treasury, an executive agency. It deals directly with more U.S. citizens than any other public or private institution.
All residents and all citizens of the United States are subject to the federal income tax. Most states also tax the income of their residents, although there are a few states that do not have an income tax. However, not everyone is required to file a return. The general purpose of income tax is to generate revenue for the federal, state, and local budgets. These funds are necessary to shape and preserve the free market economy. Along with individuals, corporations file
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income tax returns. While they are subject to many of the same rules as are individual taxpayers, they are also covered by an intricate body of rules addressed to the peculiar nature of corporations.
While most people automatically think of federal income tax when the subject of personal income tax is raised, not many people know that personal income tax was first introduced by the states. The state of Wisconsin has the dubious distinction of being the first to introduce a form of the personal income tax system in 1911. As of 2002, most states have some form of personal income tax. There are two basic methods to determine income tax, the graduated income tax and the flat rate income tax. Both methods require taxpayers to figure their taxable income.
The federal income tax is levied on taxable income of U.S. citizens and residents for the taxable year. It also applies to estates, trusts, partnerships, corporation, and other entities. The federal income tax and all other income tax laws, provide for annual returns of income. These are usually remitted to the appropriate department of revenue and cover the preceding fiscal or calendar year by the taxpayer or his representative.
There are four main steps to calculating federal income tax. These are:
Calculating total income
Subtracting deductions
Applying the right tax rate to taxable income
Subtracting withholding and other payments and credits
A taxpayer's total income can include many kinds of income:
alimony
amounts received from IRAs and pension plans
business and partnership income
dividends
interest
lottery winnings
wages
all other sources of income
The list also includes profit from the sale of stock or real property, otherwise known as capital gain. There are a few sources that are not included, such as gifts and life insurance proceeds.
After they calculate their deductions and exemptions, taxpayers subtract that amount from their gross income. The sum is their taxable income. Deductions reduce taxable income; credits reduce tax. There are four principal types of deductions:
Business deductions: These are claimed as part of a business's income tax.
Adjustments: These are deductions a taxpayer may claim even if the taxpayer does not claim itemized deductions. Adjustments include alimony and contributions to IRAs or Keogh plans. After subtracting these adjustments from total income, taxpayers arrive at their...
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