Government Income Tax Laws

Arguably the most important set of tax laws and regulations in the United States are those regarding U.S. income taxes. This is because it is the only federal law that compels each and every citizen to undertake mandatory action on an annual basis in filing an income tax return. Tax laws are often mindbogglingly complex, but the basics can be boiled down into a simple guide.

Tax Rates

The federal income tax is progressive, which means it taxes those who earn a higher income at a higher rate. This is done because a poorer person needs a larger proportion of his income just to survive. Taxing a person who makes $250,000 a year at 33 percent might seem obnoxious, but taxing a person who makes $25,000 a year at 33 percent is crippling. The 2008 schedule for a single person was: up to $8,025 (10 percent); up to $32,550 (15 percent); up to $78,850 (25 percent); up to $164,500 (28 percent); up to $357,700 (33 percent); over $357,700 (35 percent). These rates change according to the current tax law and may either rise or decrease according to circumstances. For example, in 1991, these rates were 15 percent (up to $29,250); 28 percent ($29,251 to $49,300); and 31 percent ($49,301 plus). The rates were modified on multiple occasions between 1991 and 2008. There is a separate set of income tax rates for corporations.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a complicated provision that was originally meant to collect taxes from high-income individuals or households who would otherwise use deductions and exemptions to pay little or no income taxes. There is a separate AMT for corporations. However, the AMT was modified by Ronald Reagan to include homeowner's deductions in 1986 and has not been adjusted upward for inflation since its inception. The result is that more and more Americans are required to pay taxes under its provisions, making a tax measure aimed only at the very richest Americans a burden for most upper-middle-class earners.

Deductions

Tax rates are meaningless except when placed in context with deductions. Deductions are reductions made from the actual tax bill. These considerations contribute to much of the complexity and confusion in preparing and filing income taxes. The most well-known deduction allows homeowners to deduct the interest from their mortgages from their tax bill, and this is followed by the deduction for business losses (business expenses that outstrip business income). In total, they comprise a complicated labyrinth that even many tax accountants are not entirely familiar with.

Deadline

The deadline for filing taxes is usually April 15, although the date may be moved if it falls on a Saturday or Sunday. All taxes must be postmarked (if mailed) by no later than this date. Six-month extensions can be requested and are automatically granted for the first request. The appropriate form for doing this is 4868.

Penalties

Not filing your taxes incurs a penalty of interest on the taxes due equal to the federal short-term interest rate plus 3 percent, compounded daily. Filing your taxes but with an improper amount, or not paying the required amount, incurs a smaller penalty of 0.5 percent compounded monthly. There is also a late fee for filing late and without an extension, equal to 5 percent of the tax owed for each month or part of a month that the tax is late, for up to 5 months. In addition to financial penalties, there are three crimes connected to filing or not filing income taxes. Tax evasion is rated as a felony, punishable by up to 5 years in prison and fines up to $100,000. Filing a false return is also a felony, punishable with up to 3 years in prison and fines of up to $100,000. Failing to file a return is a misdemeanor, punishable with up to 1 year in prison and fines up up to $25,000 for every year in which no return was filed. In the case of a false return or a failure to file, the government does not need to prove that tax evasion was intended, but merely that the return was wrong or not filed.

Resources

• CBO on the AMT
• IRS