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Income taxes in the United States are levied by the federal government and by state and local governments. The federal income tax, upon which this text focuses, is collected by the Internal Revenue Service (IRS), part of the Department of the Treasury. The rules for collecting income taxes are set in the Internal Revenue Code (IRC), Title 26 of the United States Code. The IRC is a statute written and regularly revised by Congress. Treasury Regulations are more detailed rules written by the IRS to effectuate the implementation of the IRC. Code provisions, which are statutory, always trump contrary regulatory provisions. Regulations can be of two types: legislative and interpretive. With legislative regulations, Congress says, for example, that depreciation will be an allowable expense "in accordance with regulations to be established by the IRS." It gives the IRS the power to make the rules. Interpretive regulations are those in which the IRS says how it will interpret and apply a given statute.
INTRODUCTION 4
I. Principal 5
II. Types 6
Personal 6
Corporate 7
Payroll 7
Inheritance 7
Capital gains tax 8
III. History 8
China 8
United Kingdom 8
IV. Around the world 9
V. Basics 10
Federal income tax rates 12
Marginal tax rates 12
VI. Effective income tax rates 13
VII. Taxable income 14
Gross income 14
Business deductions 15
Personal deductions 16
CONCLUSION 17
An individual's marginal income tax bracket depends upon his or her income and tax-filing classification. As of 2013, there are seven tax brackets for ordinary income (ranging from 10% to 39.6%) and four classifications: single, married filing jointly (or qualified widow or widower), married filing separately, and head of household.
An individual pays tax at a given bracket only for each dollar within that bracket's range. For example, a single taxpayer who earned $10,000 in 2012 would be taxed 10% of each dollar earned from the first dollar to the 8,700th dollar (10% × $8,700 = $870.00), then 15% of each dollar earned from the 8,701st dollar to the 10,000th dollar (15% × $1,300 = $195.00), for a total of $1,065. Notice this amount ($1,065) is lower than if the individual had been taxed at 15% on the full $10,000 (for a tax of $1,500). This is because the individual's marginal rate (the percentage tax on the last dollar earned, here 15%) is effected only on the portion of income exceeding that taxed at a lower bracket (here exceeding the first $8,700 of income taxed at 10%).
This ensures that every rise in a person's pre-tax salary results in an increase of their after-tax salary. Otherwise, a person earning a pre-tax 2012 salary of $8,700 would a enjoy a greater after-tax salary ($8,700 - $870 = $7,830) before a raise of his pre-tax salary to $9,200 ($9,200 - $1,380 = $7,820). However, it does occur for some wage earners that their marginal tax rate goes down once they have reached the taxable limit for the FICA or social security tax which in 2012 was paid at a rate of 4.2% on earned incomes up to $110,100, after which point the wage earners marginal tax rate decreases by 4.2% until the next income tax bracket is reached.
While the top marginal tax rate on ordinary income is 35 percent, average rates that a household in the upper income bracket pays is less. Much of the earnings of those in the top income bracket come from capital gains, interest and dividends, which are taxed at a maximum of 15 percent. Also because only income up to $106,800 is subject to payroll taxes of 15.3%, which are paid by the employer and employee, individuals in the upper income bracket pay on average an effective rate not much different than that of other income brackets. The effective tax rate paid by an individual in the upper income bracket is highly dependent on the ratio of income they earn from capital gains, interest and dividends. The table below shows the average effective income tax rates for different income groups for 2007.
Quintile |
Average Income Before Taxes |
Effective Income and Payroll Tax Rate |
Income from Capital Gains, Interest and Dividends |
Lowest |
$18,400 |
2.0% |
1.3% |
Second |
$42,500 |
9.1% |
1.6% |
Middle |
$64,500 |
12.7% |
2.5% |
Fourth |
$94,100 |
15.7% |
3.7% |
Highest |
$264,700 |
20.1% |
21.4% |
Top 10% |
$394,500 |
20.7% |
26.7% |
Top 5% |
$611,200 |
20.9% |
32.1% |
Top 1% |
$1,873,000 |
20.6% |
43.4% |
Top 400[13] |
$344,831,528* |
16.6% |
81.3% |
*Adjusted Gross Income(AGI) | |||
Income tax is imposed as a tax rate times taxable income, less applicable tax credits. Taxable income is gross income less allowable tax deductions. Taxable income as determined for federal tax purposes may be modified for state tax purposes.
The Internal Revenue Code states that "gross income means all income from whatever source derived," and gives specific examples. Gross income is not limited to cash received. "It includes income realized in any form, whether money, property, or services." 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.[14] 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 subject to tax exemption. 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 tax 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.
Deductions are permitted for most business expenses of entities and individuals. There are limits on some types of these deductions. The deduction for depreciation expense must be computed under MACRS rules. Deductions for meals and entertainment are limited to 50% of the amount incurred.
Certain deductions must be capitalized or deferred. These include:
Business losses may reduce nonbusiness income for individuals and corporations. However, losses from passive activities may reduce only income from other passive activities. 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).
Overall net operating losses (business deductions in excess of gross income) may be deducted in other years by carryover or carryback of the loss.
Individuals are allowed a special deduction called a personal exemption for dependents. This is 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 for 2009 and 2010 is $3,650. The amount is indexed annually for inflation. The amount of exemption is phased out at higher incomes through 2009; the phase out expired for 2010.
Citizens and individuals who have U.S. tax residence may deduct a flat amount as a standard deduction. Alternatively, they may claim an itemized deduction for actual amounts incurred for specific categories of nonbusiness expenses. 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, or the individual may elect to deduct state and localsales tax. 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 7.5% 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. For years before 2010, the allowance of itemized deductions was phased out at higher incomes. The phase out expired for 2010.
Contrary to what the wealthy have taught us to believe, a strongly progressive income tax does not take away from the economy or diminish incentive for honest work and creativity. The strongly progressive tax rates have been in effect for approximately 70 of the last 100 years and have served the public well. It has enhanced our freedoms and allowed the lower classes to advance rapidly. It funded important government programs and services which serve us all.
The claims to the contrary by the right wing have now proven themselves wrong across the board and are substantially responsible for the economic mess we are in today. The strongly progressive income tax coupled with the electoral reforms proposed by the Fundamental Reform Network can entirely change the way our government and economy work to the betterment of us all.
In a representative democracy such as ours, we can change this in one election if a popular revolt makes it totally clear that any incumbent or candidate for office will not receive the majority of votes cast in this fall’s elections unless they are dedicated to fundamentally change the way our government and economy works taking away the stranglehold of the rich. We have to make the message clear: We know how the game is played and we won’t stand for it any longer. Fear tactics will no longer work on us. Join us or be voted out of office. Serve the public as you are elected to do, or you’re out. Taking huge corporate campaign contributions will automatically result in our not voting for you regardless of other promises you make or how good they sound. Our votes can’t be bought. We are energized by this injustice and we are all pledged to personally vote and to turn out the votes of the 98% of us who will benefit through these changes.
Totally eliminating the ability of the ultra-rich to buy our government and economy is what we expect of our representative. This is what we demand of our representatives. Nothing less will do. It only takes about 10% of the uncommitted independent vote plus a good turn out by the Democratic base to make that happen. This is nothing compared to the approximate 5% of the voters who identify with the extreme right. The odds are strongly on our side. And what will energize that kind of surge in support? Nothing short of a plan to eliminate the corrupting influence of big money in our governmental decisions through electoral reforms and reinstating the strongly progressive income tax once and for all. This is the change we believed Obama had promised us, but it appears he succumbed to business as normal inside the belt way. Obama’s Audacity of Hope brought out the Democratic base, the independent voter and hoards of new voters especially among the young and minorities. The pundits are already forecasting the continued decline in popularity of Democrats in Congress and the President, and a resurgence of the right wing in this fall’s election. The only way that can happen is for them to successfully blame the gridlock they caused on the Democrats. But it is not nearly enough to insure the retention of power by the Democrats. Not at all. Not as long as they too are bought. We have to change the way our government is run or live with the mess we have.
We need not let that happen. We must not let that happen. The Fundamental Reform Network has a positive and achievable vision, a plan to make it happen and the means though which we can make this effort possible. “Against a great evil, a small effort does not result in a small result. It produces no result at all.” The choice is our. Will you join with us to make this happen?