What Is Income Tax Law?

History

The 16th Amendment allowed the government to assess taxes on the incomes of individuals and businesses. Just five years after the income tax was instituted, more than $5 billion dollars in taxes were collected. Federal withholding was instituted in 1943, and taxes were taken directly from employee wages before the employee receiving the payment for the time worked. This increased taxation significantly, and more than 60 million people were being taxed.

Taxes

Normal taxes are determined by net income. Individual taxes are based on income and dependents, less all deductions, including children, business expenses, etc. Business income taxes are also based on net income less all business deductions. Taxes are also levied on banking interest, estates and trusts, inheritance, capital gains, and even income earned outside the U.S.

Deductions

Personal deductions can include disability, hospital and medical expenses, children, and significantly low income levels. There are many more deductions businesses can take, and net income may be much less after all investments, improvements, employment and other business expenses are deducted. Depreciation is also deducted from business income and can be applied to any equipment and real estate or real property the company has.

Aliens

Foreign corporations and nonresidents who earn an income in the United States during the fiscal year are also responsible for paying income taxes. Interest and dividends, rent, wages, annuities, compensation, profits, and other income or gains are all taxable for nonresident aliens. Corporations in Guam, Puerto Rico, the Northern Mariana Islands, American Samoa, or the Virgin Islands are not considered foreign corporations and are exempt from foreign income taxation. Foreign corporations that are earning an income on American soil must pay the same taxes as their U.S. counterparts.

Laws

In 1981, the largest tax cut in the history of the United States was enacted. In 1986, the highest income tax rates for individuals were reduced from 50 percent to 28 percent, which is the rate it was at in 1916. The Revenue Reconciliation Act of 1990 increased the taxes on wealthy and high-income individuals. In 1993, Clinton cut capital gains taxes with another Revenue Reconciliation Act. The Economic Growth and Tax Relief Reconciliation Act of 2001 cut tax rates down to 10 percent for the first few thousand dollars individuals earned and doubled the child tax credit. In 2003, the 2001 tax cuts were accelerated. Final 2005 and 2006 tax legislation again reduced capital gains and dividend taxes and raised exemption levels to encourage retirement saving.