Gavin Howe
The 16th Amendment to the U.S. Constitution, ratified in 1913, grants Congress the authority to levy an income tax without apportioning it among the states on the basis of population. The amendment overturned the Supreme Court's 1895 ruling in Pollock v. Farmers' Loan & Trust Co., which held that income tax was a direct tax that must be apportioned among the states. Income tax in the U.S. is imposed on the profits or income of individuals and entities, such as corporations, and is used to generate revenue for the federal budget and support programs such as Social Security, Medicare, and public education. While all residents and citizens of the U.S. are subject to federal income tax, not everyone is required to file a tax return, and there are penalties for failing to do so. The process of calculating gross income, adjusted income, and taxes due can be complex, and individuals may claim deductions and tax credits to reduce their overall tax liability.
| Characteristics | Values |
|---|---|
| Power to collect income tax | Article 1, Section 8, Clause 1 (Taxing and Spending Clause) of the Constitution of the United States |
| Federal income tax | Established by the 16th Amendment in 1913 |
| Federal income tax rate in 2020 | 13.6% on adjusted gross income |
| Tax rate nature | Progressive, i.e., the tax rate increases with increased income |
| Tax code | Internal Revenue Code (IRC) |
| IRC sections | Available in Title 26 of the Code of Federal Regulations (26 CFR) |
| IRC interpretation | Treasury regulations provide the official interpretation |
| State income tax | Most states maintain an income tax, while some do not |
| State income tax returns | Filed separately from federal returns and may be due on different dates |
| Territories with own income tax laws | Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands |
| Recent federal tax changes | Signed into law on 4th and 14th June 2025 |
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What You'll Learn
The 16th Amendment
> "The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
The passage of the 16th Amendment had far-reaching social and economic impacts. It dramatically changed the American way of life, as it settled the constitutional question of how to tax income. While the amendment established Congress's power to levy an income tax, not everyone is required to file a tax return. The definition of "gross income" to which the 16th Amendment applies has been the subject of court rulings, such as Commissioner v. Glenshaw Glass Co. (1955), which defined it as "accessions to wealth, clearly realised, and over which the taxpayers have complete dominion".
In the United States, income tax laws are often used as policy instruments to encourage various undertakings deemed socially useful, such as the buying of life insurance, funding employee healthcare and pensions, raising children, home ownership, and the development of alternative energy sources. These special tax provisions contribute to the complexity of US income tax laws, which has been a source of amazement and frustration for legal scholars.
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Income tax evasion
Income tax is a federal tax on income, established by the 16th Amendment to the US Constitution in 1913. The Amendment grants Congress the authority to issue an income tax without basing it on the population of each state. The purpose of federal income tax is to generate revenue for the federal budget.
Tax evasion is not the same as tax avoidance, which involves legally reducing one's tax liability, such as through tax credits or investing in retirement accounts. Tax havens, jurisdictions with limited taxation, can be used for tax avoidance but may also facilitate tax evasion due to their lack of disclosure requirements.
In the United States, suspected lawbreakers such as Al Capone have been prosecuted for tax evasion when there was insufficient evidence for other crimes. Common methods of tax evasion include overstating charitable contributions, incorrect reporting of income, and filing false deductions.
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Gross income
The purpose of federal income tax is to generate revenue for the federal budget. Income tax laws in the US are governed by the 16th Amendment, which was passed in 1913. This amendment established Congress's right to impose a federal income tax.
For individuals, gross income includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income. It is used by lenders or landlords to determine whether an individual is a worthy borrower or renter. It is also the starting point for calculating individual tax liability.
For businesses, gross income is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods, including inventory and certain labor costs. Gross income for a business is interchangeable with gross margin or gross profit and can be found on the income statement.
It is important to note that not all gross income is taxable. Certain types of income, such as non-taxable portions of Social Security benefits or employer-provided health insurance, may be excluded from taxation or may not appear on tax returns.
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Taxable income
Income tax in the United States is governed by the 16th Amendment to the U.S. Constitution, which was ratified in 1913. This amendment established Congress's right to impose a federal income tax and states that:
> The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The 16th Amendment overturned the Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co. (1895), which ruled that income tax was a "direct" tax and therefore legally required to be apportioned among the states. The amendment also effectively reinstated the federal income tax, which had first been introduced in 1861 to meet the financial requirements of the Civil War. This initial income tax was repealed in 1872, but the concept was revived in the late 19th and early 20th centuries by progressive groups who argued that it was fairer for wealthy individuals to pay taxes rather than the middle class and poor.
Today, the Internal Revenue Code, embodied as Title 26 of the United States Code (26 U.S.C.), governs federal income tax laws. According to the Internal Revenue Service (IRS), taxable income refers to most income that is not specifically exempted by law. This includes income from money, property, goods, or services. Taxable income can include, but is not limited to:
- Freelance or independent contractor work
- Goods or services sold online
- Gig work or side jobs
- Renting out personal property
- Royalties
- Retirement plan distributions, pensions, or annuities
- Unemployment benefits
- Social Security income
- Gambling winnings
- Prizes and awards
It's important to note that even if you don't receive a form reporting income, you are generally required to report it on your tax return. Income is taxable when it is received, regardless of whether it is immediately cashed or used. Additionally, income is considered taxable even if it is paid to someone else on your behalf.
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Income tax requirements
According to the Internal Revenue Code, individuals must pay income tax on their gross income, which includes wages, dividends, rental income, unemployment benefits, capital gains, and other monetary benefits. Individuals may also be able to claim certain deductions, such as necessary medical expenses, school tuition, or mortgage interest payments, which can reduce their overall tax liability. Additionally, individuals may qualify for tax credits that further reduce the amount of tax owed to the government.
While everyone is subject to federal income tax, not everyone is required to file a tax return. Those who are required to file a return must do so by the specified deadline, or they may face penalties and additional costs for late filing. If an individual fails to file a return for more than six years, they may even be subject to criminal charges or wage garnishments by the IRS.
It is important to note that income tax laws can be complex and convoluted, and individuals should refer to the specific regulations and guidelines provided by the Internal Revenue Service to ensure they are complying with all relevant income tax requirements.
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Frequently asked questions
The 16th Amendment to the US Constitution, ratified in 1913, grants Congress the authority to levy an income tax without apportioning it among the states on the basis of population.
The 16th Amendment was passed in response to the 1895 Supreme Court case of Pollock v. Farmers' Loan & Trust Co., which ruled that income tax was a "direct" tax that needed to be apportioned among the states. The Amendment effectively overruled this decision.
Income tax is a form of government tariff that is imposed on the profits or income of individuals and entities such as corporations. The tax revenue is used to support programs such as Social Security, Medicare, defense spending, veteran benefits, and public education.
All residents and citizens of the United States are subject to federal income tax. However, not everyone is required to file a tax return, and some individuals may be exempt due to low income. Self-employed people must estimate their own tax obligations, while those working for an employer will have income taxes deducted from their paycheck.
Calculating income tax can be complicated and involves determining gross income, adjusted income, and applicable deductions and tax credits. Taxable income includes wages, dividends, rental income, unemployment benefits, capital gains, and other monetary benefits.
