Last Updated on April 2, 2023
Tax laws of a country are the rules and regulations that guide how taxes are to be paid to the local and federal authorities for property, goods, and services. The law is concerned with the legal aspects rather than the merits of taxation or legislations regarding the rate.
The USA has stringent local, state, and federal tax laws imposed at all levels. Taxes are collected on the property, imports, estates, income, payroll, sales, dividends, etc. They make a significant contribution to the GDP of the USA.
What Is Tax Law?
Going by the definition of tax law, it is a set of rules and regulations that decides how much money you owe as taxes to the authorities. It is a percentage of money that the government demands from the citizens as a financial obligation. It charges an amount on your property, your income, luxury, and also on trade and excise.
The U.S. Congress and legislature are the governing bodies that create and regulate the tax laws. When you prepare your tax return, the instructions on the form state the newest changes in the tax law every year. Any kind of tax-related dispute is dealt by tax attorneys and resolved by the tax court.
Brief History of Taxation In The United States
America was tax-free when it was born because of the lack of a federal government. The British colonizers had already imposed a levy of taxes like head tax, tea tax, and real estate on the Americans at that time.
Post the Revolutionary War, the American Congress had the right to impose taxes on the public, which the states would collect and pass on to the government. These were mainly excise taxes that the government collected.
The Civil War led to America’s first income tax and the creation of the erstwhile form of the Internal Revenue Service. This body was responsible for the collection of taxes from the states, mainly excise taxes on commodities like tobacco, gunpowder, alcohol, and tea. Income exceeding $800 required to pay tax of nearly 3%.
The expensive tax laws funded the debt of the Civil War costs. The income tax law continued till it was repealed in 1897. The corporate income taxes came into being in 1909, while the federal income tax started in 1913. It was imposed on people with an annual income of $3,000 or more, thus saving the poorer section.
Several other taxes were soon enacted, such as the Sales tax in 1921 in Virginia and 11 more states in 1933, and the Social Security Tax in 1937. The rising number of taxes during Roosevelt’s New Deal and the ongoing Second World War help to incur the expenses.
Why Is Taxation Important?
Taxes are important to fund the government’s expenditures. It has a significant contribution to the country’s GDP every year and helps to run the state’s expenditures. In earlier days, taxes supported armies, ammunition and supported the lifestyle of the ruling classes. As the ruling classes made way for progressive governments, taxes began to be collected for the benefit of the state.
Progressive taxation laws charged the high-income earners more to establish an egalitarian society. High taxes began to be levied on alcohol, tobacco, and gasoline to limit their consumption. Presently, taxes are calculated to ensure a citizen’s contribution to the running of the state.
What Are The Types Of Tax Law?
Tax laws in the United States operate at all levels. A thorough glance at the tax structure on GovInfo will give law students a clear idea regarding the different types of tax laws and how they operate. As law professionals, you need to have a distinct idea about what is tax law, the different functional tax laws, the tax process, and their area of operation.
What Is Federal Tax Law?
The federal tax law in the US is based on the Title 26 of US Code, known as the Internal Revenue Code. Read more about the U.S. Codes, and especially, the tax code on the law portal Lawrina. The Internal Revenue Code has 11 subtitles that cover the different aspects of federal taxation, including taxes on income, gift, estate, and excise.
All the rules and regulations regarding tax forms are based on the code and its subtitles. It also sets the procedures to be followed both by the IRS and the taxpayers regarding the payment of taxes.
State and Local Tax Laws
State and local level tax laws can vary. Not all states impose an income tax, but some states may tax the citizens on sales, property, and inheritance. These are different from the federal laws. Also, cities and counties may create local tax laws. New York State and New York City have separate income taxes imposed on the citizens, apart from the federal income tax.
What Is One Of The Limitations Of Taxing?
Limitations are restraints on the taxation law by either the constitution, custom, or political matters. For instance, it is stated by the constitutional law that there should be a connection between the taxing power and the subject. Also, the taxing authority cannot impose the same tax on a person twice on any ground.
Different Types of Taxation
The tax laws mention various kinds of taxes on several areas of public life. Some of these are:-
Income Tax
The governments impose an income tax on a person’s financial income per year. It applies to businesses as well as individuals within the jurisdiction. The income tax is a federal tax, but some states and cities may impose a separate income tax on citizens. Thus, you have to pay income tax both on federal and state levels. Every income earner in the U.S. can find income tax deductions on the paycheck.
Presently, the USA has imposed 7 federal income tax brackets on the citizens. The rates start from 10%, 12%, 22%, 24%, 32%, 35% and end at 37%.
According to the 2021 tax brackets, single tax filers with an annual income from $0 to $ 9,950 are liable to 10% income tax. Married couples filing their taxes jointly need to pay 10% for a yearly income of $0 – $19,000. For single people earning $11,000 or more, the first $9,950 is taxed at 10%, while the remaining falls under the next bracket of 12% rate.
The tax brackets for 2022 are:
2022 Federal Income Tax Brackets For Single Filers and Joint Filers
| Rate | Single Individuals | Married Couples Filing Jointly |
| 10% | $0 to $9,950 | $0 to $19,900 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 |
| 37% | $523,601 or more | $628,301 or more |
Corporate Tax
This federal tax is imposed on businesses to claim a share of their profits. Under the current corporate tax law regulations 2022, the government charges 21% federal corporate taxes plus state corporate taxes on business organizations, combining into almost 25.8 %.
Capital Gains Tax
Capital gains taxes are imposed on profits by individuals or businesses on selling properties, assets, bonds, stocks, etc. Any kind of real estate or other assets sale in the US is taxable under this law.
- Short-term capital gains tax applies to the gains made from the sale of an asset held for less than twelve months.
- Long-term capital gains tax applies to the sale of assets held for more than one year. The rates range from 15% to 20%, depending on the profits made.
For instance, in 2022, single tax filers need not pay any capital gains tax on income of $0 to $40,400. But, any income from the sale of assets from $40,401 to $445,850 is chargeable at 15% capital gains tax.
Property Tax
Property tax in the USA is calculated on the real estate and property value and is imposed on the owner. The property tax rate may vary from state to state. Hawaii has the lowest property tax rate at 0.28%, while Alabama has the second-lowest at 0.41%. The property taxes are highest in Illinois, soaring up to 2.27% and 2.49% in New Jersey.
Inheritance Tax
This kind of tax is imposed on the citizens who inherit the property of a dead person legally.
Sales Tax
Sales tax is one of the most important taxes in the US, levied on business owners on the sale of their products and services. The sales tax can be divided into Goods and Services Tax (GST), Value Added Tax (VAT), excise tax, and state sales tax. Therefore, the sales tax rates may vary from state to state, and from city to city. California has the highest sales tax rate of 7.25%, the highest in the country.
Conclusion
Attorneys and law students dealing with tax laws need to read the tax publications daily. They must always remain updated with the recent changes and additions in the tax laws and IRS guidance in order to practice. It’s necessary to keep an eye on trusted legal sites like the official website of the Internal Revenue Service and others to remain updated. Investopedia, too, has a fair share of the latest articles on legal and financial information. Spending time researching the tax laws and understanding the changes that come with time is the key to becoming successful tax attorneys in the US.
