Our Favorite Uncle: Sam

History of Taxation

  • First Federal income tax in 1861
  • Repealed after Civil War
  • Reinstated in 1894
  • Supreme Court ruled unconstitutional in 1895
  • 16th Amendment on March 1, 1913
  • Revenue acts prior to codification in 1939

Manner in Which Tax Law is Changed Or Modified

  • Federal income tax is changed on an incremental basis rather than a complete revision.
  • The tax law has been referred to as a quiltwork of tax law.

1913 Tax Form

  • 1% on amount over %%EDITORCONTENT%%nbsp; 20,000 and not exceeding %%EDITORCONTENT%%nbsp; 50,000
  • 2% on amount over %%EDITORCONTENT%%nbsp; 50,000 and not exceeding %%EDITORCONTENT%%nbsp; 75,000
  • 3% on amount over %%EDITORCONTENT%%nbsp; 75,000 and not exceeding $100,000
  • 4% on amount over $100,000 and not exceeding $250,000
  • 5% on amount over $250,000 and not exceeding $500,000
  • 6% on amount over $500,000

3 Types of Income Tax Rates

  • Progressive
    • Rate increases as tax base increases
    • Individual income tax
  • Proportional or flat tax
    • E.g., sales tax
  • Regressive
    • Rate decreases as tax base increases
    • E.g., FICA tax

Marginal and Effective Tax Rates

  • Marginal tax rate (Tax Bracket)
    • Tax rate applied to incremental amount of taxable inc that is added to tax base
  • Effective tax rate
    • Total tax liability divided by total income

Determination of Taxable Income and Tax Due

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $9,275 $0 to $18,550 $0 to $13,250
15% $9,275 to $37,650 $18,550 to $75,300 $13,250 to $50,400
25% $37,650 to $91,150 $75,300 to $151,900 $50,400 to $130,150
28% $91,150 to $190,150 $151,900 to $231,450 $130,150 to $210,800
33% $190,150 to $413,350 $231,450 to $413,350 $210,800 to $413,350
35% $413,350 to $415,050 $413,350 to $466,950 $413,350 to $441,000
39.6% $415,050+ $466,950+ $441,000+

Example of Calculating Tax Due

Married Filing Joint with a total wage of $250,000
1st $18,550 x 10% = $1,855.00
($75,300-$18,551) x 15% = $8,512.35
($151,900-$75,301) x 25% = $19,149.75
($231,450-$151,901) x 28% = $22,273.72
($250,000-$231,451) x 33% = $6,121.17
Total Tax Due = $57,911.99


This is why tax deductions and credits are a crucial part of our tax system!

Tax Deductions and Credits

  • Deductions are expenses that lower your taxable income. It is subtracted “off-the-top” from the amount of money you made throughout the year. Once all deductions are subtracted, this amount is known as your adjusted gross income or AGI.
  • Credits are dollar-for-dollar reductions that are subtracted from your tax liability.

Common Deductions

  • Job Hunting Expenses
    • To deduct job-hunting expenses, you must be looking for a job in your present line of work (i.e., you’re not changing professions or looking for your first job). Some expenses include but are not limited to:
      • Resume preparation
      • Employment agency fees, Executive recruiters’ fees
      • Career counseling to assist you in improving your position
      • Legal and accounting fees you pay in connection with employment contract negotiations and preparation
      • Transportation costs to job interviews
  • Uniforms and Gear
    • Protective clothing and gear
    • Uniforms (except if you’re full-time active duty in the armed forces)
    • Dry cleaning costs for your uniforms or protective clothing (not for your everyday clothing, though)
    • Specialized clothing designed for your job, as long as it’s not suitable for everyday wear
    • Safety equipment, such as hard hats, safety glasses, safety boots, and gloves
  • Real estate expenses:
    • Mortgage interest
    • Mortgage prepayment penalties
    • Penalties of early withdrawals
    • Points on principal residence financing
    • Real estate taxes
  • Auto registration fees
  • Charitable contributions (cash and non-cash) made to qualified U.S. charities.
  • Investment expenses:
    • Accounting fees (preparation of tax return)
    • Brokerage fees
    • Investment fees
    • Legal fees
    • Safe deposit box rental
    • Interest on margin accounts
  • Casualty and theft Losses
  • Taxes
    • Ad valorem tax
    • Certain special assessments
    • Foreign taxes
    • Income tax (state and local)
    • Occupational taxes
    • Personal property tax
    • Real property tax
    • Withholding taxes
  • Qualified Medical Expenses
    • Generally, you can only deduct the excess over 10% of Adjusted Gross Income, and then only if you can itemize on Schedule A.

Common Credits

  • Credit for Overpaid Social Security Taxes
    • If you had more than one employer and earned over $106,800 in combined salary, you almost certainly had too much Social Security tax withheld.
  • Dependent Child Credit
    • If you had at least one dependent child who was under age 17 at the end of last year, the credit is $1,000 per qualifying child. Unfortunately, this break is phased out starting at high adjusted gross incomes.
  • Dependent Care Credit
    • If you pay someone to take care of your under-age-13 child so you can work, you could be eligible for the dependent care credit. (If you’re married, your spouse must also work or be going to school.)
  • American Opportunity and Lifetime Learning Credits
    • The American Opportunity and Lifetime Learning Credits are credits for attending an accredited higher education institution (college or university).
  • Adoption Credit
    • If you adopt an under-age 18 child, you may qualify for a tax credit to offset your adoption expenses. If you are married, you must file a joint return to qualify.
  • Energy Efficiency Tax Credit
    • The energy efficiency tax credit is offered to individuals who install energy-efficient home improvements. The credit is capped for windows, insulation, heating, non-solar water heating systems, air conditioning, ventilation, doors, metal and asphalt roofs and biomass stoves.
  • Earned Income Tax Credit
    • The earned income credit is a refundable tax credit designed for lower income working families and individuals.
  • Retirement Savings Contribution Credit
    • The Retirement Savings Contribution Credit is a federal tax credit designed to encourage low- and modest-income individuals to save for retirement. The credit is a percentage of savings, from 10% to 50%.

Administration of the Tax Law

Selection of returns for audit

  • 2.5% per year at random
    • Statute of limitations
      • General rule 3 years from later of the date  tax return was actually filed or due date
      • Six years if taxpayer omits items of gross income that in total exceed 25%
      • Indefinite if fraudulent return filed or no return filed