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A Brief Overview of Income Tax in the United States

written by: John Garger•edited by: Laurie Patsalides•updated: 6/29/2011

Before you file your 2009 Federal income taxes with the Internal Revenue Service, read this article in a series of 14 about what income taxes are and why you must file. The remainder of the series is dedicated to the 1040 tax form and its many schedules and sub-forms.

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    Federal Income Tax Explained

    For many Americans, tax time is a stressful event. All the forms, laws, and regulations create a complex maze of calculations that leave many tax payers wondering of whether they completed the process properly. Many turn to tax experts, especially when the tax payer’s situation is complicated and warrants professional help. Understanding the concept of Federal Income Tax is simple; the actual process with its twists, turns, and seemingly-unlimited forms is complex.

    The U.S. Federal Government imposes a progressive income tax structure on its citizens, businesses, and other entities. The added complexity of varying state and local income taxes makes the tax paying process that much more difficult. Federal Income Taxes were first collected in the United States during the Civil War of the 1860s. The Sixteenth Constitutional Amendment of 1913 has been the guiding income tax law since its ratification which stipulates that:

    “The Congress shall have power to lay and collect taxes on incomes…"

    Income taxes are quite simple from a theoretical standpoint. A tax paying entity’s gross income (all amounts of money for the tax paying year) minus any and all exclusions results in an Adjusted Gross Income (AGI) figure. Subtracted from AGI are any allowable deductions and exemptions to arrive at a Taxable Income figure. This Taxable Income is multiplied by a tax rate to arrive at the appropriate tax liability. Payments of expected Income Tax paid throughout the year through an employer or through a special schedule for self-employed individuals, results in either a positive or negative tax liability. A positive amount is the amount owed to the Federal Government and a negative amount is a refund of overpayment.

    Although the process seems simple enough, the choice of itemizing deductions or taking the standard deduction, the tax payer’s filing status, and extra income from interest, dividends, and capital gains can make the process complex as more and more forms must be filled out. Taxes for business owners can also be complicated as money for costs of doing business must be properly accounted for including non-cash changes to income such as depreciation of assets.

    In 1993, an investment professional named Kurt Hauser suggested that Federal Income Taxes were a function of the Gross Domestic Product of the United States. His research found that in post World War II America, Federal Income Taxes have remained steady at about 19.5% of the GDP regardless of the tax rates imposed by Congress and regardless of changes in the GDP value. Hauser’s findings were later found to be true for years following World War II.

    Although figuring tax liability is a complicated matter, the U.S. Government has enacted steps to simplify matters such as providing a step-by-step package with questions to which an answer of yes or no directs the tax payer to the proper form. This has been bolstered by the Internet with the ability to submit tax liabilities online and the year-round availability of all tax forms and instructions at, the official website of the Internal Revenue Service.

    Always consult with a tax professional for questions about your tax liability.