Know Your Taxes – Income Tax

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United States citizens are responsible to pay a yearly income tax based on their taxable income, which is their net income minus allowable deductions.  Many citizens are responsible for paying national, state and local income tax.  Interestingly, there are several states including Texas, Alaska, Nevada, North Dakota, Washington, Wyoming and Florida that charge their citizens no state income taxes.

Taxes are due on April 15th of each year, and citizens who do not pay their taxes on time are penalized with fees.  Taxpayers self-assess their tax burden, either by themselves using tax forms, by themselves using tax accounting software, or with the help of tax preparers.  The Internal Revenue Service reserves the right to audit tax returns.

The first personal income tax was not implemented until 1861 to help the country pay for the Civil War.  The first non-war time income tax was imposed in 1894.  This tax was charged at 2% for income over $4,000, of which only 10% of U.S. citizens qualified.  In 1913, the Sixteenth Amendment was passed, which gave Congress the right to impose taxes.

The United States tax code has a long and varied history.  At some points in history, those in the highest income bracket were charged as much as 94% of their taxable income.  Because some see the current tax code as unnecessarily complicated, there have been various plans to change it which range from imposing a consumption tax or a  currency conversion tax, but thus far neither movement has gained much ground.

Currently, income taxes are low.  The lowest tax bracket is at the lowest rate it has been since 1936, and the highest tax bracket is at the lowest it has been since 1991.  Many speculate that federal income tax rates will have to be increased to cover the national deficit, which continues to grow.

For more information, see Income Tax in the United States.