Far reaching in its social as well as its economic
impact, the income tax amendment became part of the Constitution by a curious
series of events culminating in a bit of political maneuvering that went awry.The financial requirements of the Civil War prompted the first American
Income Tax in 1861.At first, Congress placed a flat 3-percent tax on all incomes
over $800 and later modified this principal to include a graduated tax.Congress repealed the income tax in 1872, but the concept did not
disappear.
After the Civil War, the growing industrial and financial
markets of the Eastern United States generally prospered.But the farmers of the South and West suffered from low prices for their
farm products, while they were forced to pay high prices for manufactured goods.Throughout the 1860?s, 1870?s, and 1880?s, farmers formed such
political organizations as the Grange, the Greenback party, the National Farmers
Alliance, and the People's (Populist) Party.All these groups advocated many reforms considered radical for the times,
including a graduated income tax.
In 1894, as part of a high tariff bill, Congress enacted a
2-percent tax on income over $4,000.The
tax was almost immediately struck down by a five-to-four decision of the Supreme
Court, even though the Court has upheld the constitutionality of the Civil War
Tax as recently as 1881.
Although farm organizations denounced the Court's
decision as a prime example of the alliance of government and business against
the farmer, a general return of prosperity around the turn of the Century soften
the demand for reform.Democratic
Party Platforms under the leadership of three-time Presidential candidate
William Jennings Bryant, however, consistently included an income tax plank, and
the progressive wing of the Republican Party also espoused the concept.
In 1909 progressives in Congress again attached a provision
for an income tax to a tariff bill.Conservative,
hoping to kill the idea for good, proposed a constitutional amendment enacting
such a tax; they believed an amendment would never receive ratification by
three-fourths of the states.Much
to their surprise, the amendment was ratified by one state legislature after
another, and on February 25, 1913, with the certification by Secretary of State
Philander C. Knox, the 16th amendment took effect.Yet in 1913, due to generous exemptions and deductions, less than 1
percent of the population paid income taxes at a rate of only 1% of net income.
The full potential of the income tax for revenue and for
the redistribution of wealth was realized for the first time during the New
Deal.President Franklin D.
Roosevelt declared our revenue laws have operated in many ways to the unfair
advantage of the few, and have done little to prevent an unjust concentration of
wealth and economic power. The
Revenue act of 1935 popularly called the Wealth Tax Act, went a long way toward
remedying the evils described.It
provided steeply graduated personal income taxes up to 75% on income in excess
of $5 million.Wealthy Americans
deplored the leveling effect of a graduated income tax and called President
Roosevelt a ?traitor to his own class.?Almost immediately, income tax evasion became an important area of
criminal activity.
President
Roosevelt signing Social Security Act into law, August 14, 1935
The income tax did not directly affect most
Americans until World War II:In
1939 only 5 percent of Americans paid federal income taxes.But the Revenue act of 1942 raised tax rates, lowered exemptions, and
created the Victory Tax of 5 percent on incomes over $624, broadening the income
tax base considerably.The new
payroll withholding tax was the greatest change for the majority of Americans.
The "Pay-As-You-Go" tax plan, developed by Beardsley Ruml, the treasurer of
the R. H. Macy department store, was adopted in the Current Tax Payment Act of
1943.The result of the new tax
plan was that over 74 percent of Americans were paying federal income taxes by
1945.
TAX TERMS
AS PUBLISHED BY THE Internal Revenue Service
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1040PC
A 1040PC is a paper tax return prepared on a computer using the approved
IRS tax preparation software. Taxpayers mail the form (return) to the
IRS and the IRS can directly deposit refunds into savings and checking
accounts. It's that simple.
ABILITY TO PAY
Jane makes a ton of money each year, and flies (on her private jet) to
and from her houses in Miami and New York. Tough life. John earns a more
modest salary and rents a small apartment. Jane and John do NOT pay the
same amount in taxes. Their ability to pay differs vastly. John pays
less, for his amount of income (wages, interests, profits) and assets
(houses, cars, stocks, savings accounts) is less than Jane's.
ADJUSTED GROSS
INCOME
A person's entire income reduced by adjustments including a deduction
for an IRA (Individual Retirement Account), medical savings accounts,
and alimony paid to an ex-spouse. Note to the wise: Saving money now in
an IRA for your retirement (yes, even though it seems like a million
years away) could be one of your smartest moves yet.
BENEFITS
RECEIVED
When people pay taxes according to the amount of government aid
(benefits) they receive. Examples of benefits the American public
receives include (to name only a few): welfare, child care, Medicare,
Medicaid. Some people believe it's only fair that people pay taxes based
on the amount of government aid they receive.
BUSINESS TAXES
Are you a budding entrepreneur? Just remember that businesses pay taxes
to federal, state and local governments. Businesses pay taxes on their
profits. Businesses also pay unemployment insurance, worker's
compensation, social security and Medicare insurance.
CREDITS
If you have a store credit, you can use the credit to purchase
merchandise free of charge. If you have a tax credit, your taxes are
reduced by the amount of your credit. You can get tax credits for
purposes such as child care expenses and the earned income credit for
low-income taxpayers.
DEPENDENT
A person who relies on someone else for financial support. Sound like a
mooch? Not really. Think about it- most "young adults" (under
21 years old) are supported by their parents. Is this you? If it is,
your parents can claim an exemption for you-their adorable dependent-if
dependency tests are met.
DIRECT DEPOSIT
When you give the IRS the go-ahead, they'll send your refund directly to
your bank account. It's the fastest way to get your cash.
DIRECT TAX
A direct tax cannot be shifted to others (unlike an indirect tax). A
good example of a direct tax is the Federal income tax. You just gotta
pay it.
DIVIDENDS
Are you a stockholder? If you are, you receive dividends, or a portion
of a company's earnings and profits.
EARNED INCOME
In simple English: All the money you earn. This includes any wages,
salaries, tips, net earnings (if you're self-employed), and any other
income received for personal services. Add it all up, it's all earned
income.
EARNED INCOME
CREDIT
Not exactly rolling in dough? Low-income workers can file a tax return
to get an earned income credit, even if no income tax was withheld from
the worker's pay.
ELECTRONIC
FILING (IRS e-file)
It pays to be computer savvy! Taxpayers can now file their tax
information with personal computers and tax preparation software. The
information goes directly to the IRS and the IRS can directly deposit
refunds into the taxpayer's bank account. Electronic filing allows
taxpayers to get their refunds quickly. Check out IRS
e-file.
ELECTRONIC
FILING (IRS e-file) OPTIONS
IRS e-file options allow you to file Federal income tax returns (and
some state returns) through a tax professional, through your home
computer or even through your telephone. It may also be available in
many other places in your local community.
EXCISE TAXES
Excise taxes are taxes on the sale or use of certain products or
transactions. So every time you make a telephone call, buy a plane
ticket, or ride in a car (to name but a few) you'll be paying excise
taxes.
EXEMPT (from
withholding)
Have you ever been exempt from taking an exam because your average was
high enough? What a feeling! Well, taxpayers can be exempt from paying a
certain amount of federal income tax if they meet certain income, tax
liability, and dependency requirements. In fact, you could be exempt
from having certain taxes taken out of your paycheck. If you have a job,
be smart and check into this.
EXEMPT (from
tax liability)
Before a taxpayer pays taxes, he/she can claim a set amount of tax
deductions for him/herself, a spouse and eligible dependents. The total
amount is subtracted from the adjusted gross income. Then the tax on the
remaining income is figured out.
FICA (Federal
Insurance Contributions Act)
The Federal Insurance Contributions Act (FICA) consists of both a Social
Security (retirement) payroll tax and a Medicare (hospital insurance)
tax. The tax is levied on employers, employees, and certain
self-employed individuals.
FEDERAL
EMPLOYER IDENTIFICATION NUMBER (EIN)/FORM SS-4
EINs are used to identify the tax accounts of businesses. You need to
get an EIN if you have employees or operate your business as a
partnership or corporation. An EIN is also needed if you have a Keogh
retirement plan or file certain tax returns. Form
SS-4, An Application for Employers Identification Number,
is used to request an EIN.
FEDERAL/STATE
ELECTRONIC FILING
Cutting edge! Certain states allow taxpayers to file tax information for
both federal and state income tax returns with home computers and tax
preparation software.
Federal
Employer Identification Number (EIN)/Form SS-4
EINs are used to identify the tax accounts of businesses. You need to
get an EIN if you have employees or operate your business as a
partnership or corporation. An EIN is also needed if you have a Keogh
retirement plan or file certain tax returns. Form
SS-4, An Application for Employers Identification Number, is used to
request an EIN.
FILE A RETURN
To file a return is to send in your completed tax forms, or return
("return" is the official term-use it, you'll sound smarter).
All your tax information appears on the return, including income and tax
liability.
FILING STATUS
Your filing status determines your tax bracket and amount of taxes you
must pay. Factors such as marital status affect your filing status.
FORM
1040EZ
This form is great if you're single or married, don't have any
dependents and aren't rolling in dough. If your income is $50,000 or
less and your interest income is $400 or less --- use this easy (get it,
EZ) IRS form to file your return.
FORM
W-2
By January 31 of each year --- your employer (even if you don't work
there anymore) will provide you with a statement of how much you earned
in wages, tips and other compensation from the previous year. This form
will reflect state and federal taxes, social security, Medicare wages,
and tips withheld. It also includes a lot of other really important
information you will need to file your return.
FORM
W-4 (Employee's withholding allowance certificate)
If you have or had a part-time or summer job, you probably completed
this form on your first day of work. This form determines how much of
your paycheck is withheld for federal income taxes.
FORMAL TAX
LEGISLATION PROCESS
There are strict steps (that involve the President and Congress) that a
proposed tax must pass through before it becomes a law.
GROSS INCOME
This deals with all the money, goods and property you receive that must
be included as taxable income. Fact: people who use the barter system
(exchanging non-monetary goods/services as payment) have to include
whatever they've bartered for as part of their gross income.
INCOME TAXES
These are taxes on income, both earned income (salaries, wages, tips,
commissions) and unearned income (interest from savings accounts,
dividends if you hold stock). Individuals and businesses are subject to
income taxes.
INDIRECT TAX
You might not think you're paying this tax, but you probably are. It's
the type of tax that can be shifted to others: hence the name. For
example: A company might have to pay a specific tax to the government,
let's say a fuel tax. The company pays the tax but can increase the cost
of their products so consumers are actually paying the tax indirectly by
paying more for the company's products.
INFORMAL TAX
LEGISLATION PROCESS
Ever joined a book club? What about a study group? Well, if you're
interested, there are also informal tax legislation meetings where
individuals and interest groups get together to discuss tax issues. Once
you become a steady wage earner, these are meetings you probably won't
want to miss.
INTEREST INCOME
You deposit your money into a savings account for a reason, right? So
you can earn interest on your money. People also earn interest from
lending money to people. We're not talking about you lending your buddy
Dave a couple bucks to buy lunch, we're talking about lending lots of
money so the interest really accumulates on the loan. Well, add up all
that interest you accumulate and there's your interest income. Not to
burst your bubble, but that interest income is all fully taxable.
LOCAL
TAXES
In addition to federal and state taxes, your local town or city may also
need tax money to operate services such as garbage pick-up, water
treatment, and street-cleaning.
MEDICARE
The Medicare program funds the federal health program for people over
65. It helps out people at a time in their lives when they may have
health problems but may not have a lot of money.
PAYROLL TAXES
Your employer deducts a certain amount from your paycheck to pay for
taxes. This tax money funds many finance specific programs, including
social security, health care and worker's disability. These programs
might not mean a whole lot to you now, but you may likely benefit from
them when you're older. Check out It's
Payday!
PERSONAL INCOME
TAX
Everyone pays a tax on his/her yearly total amount of taxable income.
Remember that the personal income tax is not a tax on the taxpayers
total income (the taxpayer can take deductions). Deductions are
subtracted first from the taxpayer's income and then he/she pays the tax
on the remaining amount.
PROGRESSIVE TAX
This type of tax takes a larger percentage of income from higher income
groups than from low-income groups. Is this fair? Check out What
is Fair?
PROPERTY TAXES
It's likely you've landed on "property tax" when playing
Monopoly. In real life, people pay taxes on property, including real
estate, boats, cars, recreational vehicles, and business inventories.
Something to think about before you buy that new car. Check out What
is Fair?
PROPORTIONAL
TAX
Proportional taxes take the same percentage of income from everyone
regardless of how much (or little) a person earns. This type of tax is
not currently in use, but some feel it's the way to go. What do you
think? Check out What
is Fair?
PUBLIC GOODS
AND SERVICES
Do you attend a public school? Ever wonder who pays for your education?
Taxpayers! Tax money is used for a variety of public goods and
services-all available for use by the public (that includes you and your
friends). Some examples of public goods are national defense, street
lights, and roads and highways. Public services include welfare
programs, sanitation, law enforcement, and education.
REDEVELOPMENT
OR ENTERPRISE ZONE
The government can designate an area as a redevelopment or enterprise
zone, meaning that the area is in desperate need of some serious
improvements. No, your room probably wouldn't make the cut-you'll have
to do that restoration on your own. A neighborhood in complete disarray
(burned out buildings, broken sidewalks, potholes in the street, etc.),
on the other hand, could qualify as such an area and taxpayer money
could help fund the restoration process.
REFUND
When your employer deducts too much money from your paycheck, the
government owes you that money back. When they pay it, it's called a
refund.
REGRESSIVE TAX
This is the tax that takes a smaller percentage from those with high
income than from those with lower income. Is this fair? What do you
think?
SALES TAXES
You gotta have that new CD, but do you have enough cash? Don't forget to
add the sales tax to the price. Depending on the state you live in, you
pay an extra percentage of sales tax for items purchased.
SCHEDULE
Your class schedule essentially organizes your day, right? Taxpayers
have to be organized too. They use certain schedules (or forms) to
itemize specific sources of income or specific expenses they claim
should be deducted from their taxes. It can pay to be organized!
SOCIAL SECURITY
Social Security is America's government-run retirement plan. One day,
when you're your grandparents' age, you'll get the money back.
STANDARD
DEDUCTION
Some taxpayers choose to take a standard amount instead of itemizing all
of their deductions. This is a fixed amount that is generally based on a
person's filing status.
STATE
TAXES
There are all kinds of taxes which are used to pay for all sorts of
things. Some of our money goes to the Federal government, which pays for
services like Interstate highways, the armed forces, the FBI, and a lot
more. Your state also needs money for schools, roads, state troopers-to
name just a few. At the end of the tax year, you will need to send one
form to the Federal government, and another to your state government.
TARIFF DUTY
(Customs Duty or Import Duty)
Ever travel abroad and do a little duty-free shopping at the airport?
You're buying tax-free products. When you buy that same product at your
corner store (assuming it's not a duty-free shop), you're paying a
tariff duty or tax on the product.
TAX CREDITS
The amount of money that tax payers can deduct directly from their
taxes.
TAX DEDUCTIONS
The amount that a person or business can subtract from their taxable
income. The more you can deduct, the less you pay.
TAX EXEMPTIONS
Pretty excited when you're exempt from gym class? Taxpayers are pretty
happy when they see there's a part of their total income on which no tax
is imposed. That's a tax exemption.
TAX LIABILITY
(or total tax bill)
There's no getting out of it- tax liability is the total amount of tax
that a person must pay. Taxpayers pay this through withholdings,
estimated tax payments, and payments attached to their yearly tax forms.
TAX PREPARATION
SOFTWARE
This is software created specifically with the IRS in mind. It's
designed to help you prepare your taxes on a computer. The software
works with the e-filing system to let you file quickly and accurately.
Check the Digital
Daily for software recommended by the IRS.
TAX SHIFT
One lucky person or group is able to shift a tax that they're supposed
to pay to someone else.
TAX WITHHOLDING
There's a portion that your employer takes from your (and other
employees) paycheck to pay part or all of your taxes. Check out It's
Payday!
TAXABLE INCOME
Everything you earn that can be taxed.
TAXES
Taxes are required payments of money to the government. This money is
used to make your life better. You might not even realize it, but tax
money provides public goods and services for the community as a whole
(think roads, schools, law enforcement, public libraries, etc.). Show a
little gratitude, pay your fair share.
TELEFILE
The IRS knows that lots of people don't have access to a home computer.
Most people do have a touch-tone phone, though. TeleFile lets you use
your phone to send tax information to the IRS computer. The IRS must
send you the booklet. Check out IRS
Telefile
TIPS
Here's a tip on receiving tips: If you earn more than $20 a month in
tips, you must report the amount to your employer. To keep track of your
tips keep a daily "tips-earned log" where you write down the
exact amount of tips you earn each day. Share the monthly total with
your employer who will make certain federal, state, and local taxes are
paid. Remember, it still pays to be nice . . . so don't forget to smile.
Check out It's
Payday!
Publication
1244 contains forms for daily record keeping of tips and for
reporting tips to your employer. The freely available Adobe
Acrobat Reader is required to view this publication.
TRANSACTION
TAXES
The sale of all goods and services have transaction taxes. These taxes
can be a set percentage of a sales value or a set amount of a physical
quantity. What's that all about? Let's say you buy a CD-you pay a set
amount in sales tax, but when you fill up your tank with gas, you pay a
tax per gallon.
VERTICAL EQUITY
Who said all taxpayers are created equal? Vertical equity states that
people in different income groups should pay different rates of taxes.
Our current tax system is one of vertical equity.
VOLUNTARY
COMPLIANCE
Your mom might order you to clean up your room. Well, the IRS doesn't
have time to tell every single taxpayer to file taxes correctly and on
time . . . there are millions of taxpayers in this country after all.
This system relies on citizens to report their income, calculate tax
liability and file tax returns on time. Everyone's gotta grow up
sometime. Check out It's
Payday!
VOLUNTEER
INCOME TAX ASSISTANCE (VITA)
Available in most communities are Volunteer Income Tax Assistance (VITA)
sites to help with tax return preparation. People volunteer their time
to help their neighbors. The service is free to those with limited or
moderate income people, non-English speaking, the elderly and the
disabled. Some VITA sites even offer free electronic filing. If you want
to know more about a VITA site in your community or volunteering your
time, call your local District Taxpayer Education Coordinator. Check out
IRS e-file
WALK-IN
ELECTRONIC FILING
If you need help preparing your taxes visit the Voluntary Income Tax
Assistance (VITA) office nearest you. Many VITA offices have IRS
representatives who can help you fill out your forms and then transmit
the information on your forms electronically.
WITHHOLDING
("Pay-as-you-earn" taxation)
Your employer takes out a certain amount from your check for the
government. You are credited for these taxes when you file your return.
This money is used to pay for your federal income taxes, federal social
security, and Medicare taxes, and state and local income taxes. Check
out It's
Payday!
WITHHOLDING
ALLOWANCE
When you fill out the Form W-4 your employer can figure out the total
amount in taxes to deduct from your paycheck. Your withholding allowance
is the total number of allowances, or exemptions you claim. The employer
also uses your total amount of income earned and marital status to
figure out these allowances and exactly how much income tax to withhold
from wages.
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