Income tax in the United States

Individuals may deduct certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items.

Some deductions are subject to limits, and an Alternative Minimum Tax (AMT) applies at the federal and some state levels.

Most states and localities follow these definitions at least in part,[6] though some make adjustments to determine income taxed in that jurisdiction.

Adjustments (usually reductions) to gross income of individuals are made for contributions to many types of retirement or health savings plans, certain student loan interest, half of self-employment tax, and a few other items.

For 2021, the basic standard deduction was $12,550 for single individuals or married persons filing separately, $25,100 for a joint return or surviving spouse, and $18,800 for a head of household.

In addition, losses may not, in most cases, be deducted in excess of the taxpayer's amount at risk (generally tax basis in the entity plus share of debt).

Alternatively, individuals may claim itemized deductions for actual amounts incurred for specific categories of nonbusiness expenses.

Medical expenses in excess of 10% of adjusted gross income are deductible, as are uninsured casualty losses due to a federally declared disaster.

Beginning in 2013, capital gains above certain thresholds is included in net investment income subject to an additional 3.8% tax.

Many types of business entities, including limited liability companies (LLCs), may elect to be treated as a corporation or as a partnership.

Federal corporate income tax is imposed at 21% from 2018. Dividend exclusions and certain corporation-only deductions may significantly lower the effective rate.

For example, insurance companies must ultimately pay claims to some policy holders from the amounts received as premiums.

The company must report to each owner his/her share of ordinary income, capital gains, and creditable foreign taxes.

Federal tax applies to interest, dividends, royalties, and certain other income of nonresident aliens and foreign corporations not effectively connected with a U.S. trade or business at a flat rate of 30%.

Article I, Section 8, Clause 1 of the United States Constitution (the "Taxing and Spending Clause"), specifies Congress's power to impose "Taxes, Duties, Imposts and Excises", but Article I, Section 8 requires that, "Duties, Imposts and Excises shall be uniform throughout the United States.

Because the Treaty of Ghent was signed in 1815, ending hostilities and the need for additional revenue, the tax was never imposed in the United States.

This taxation of income reflected the increasing amount of wealth held in stocks and bonds rather than property, which the federal government had taxed in the past.

[79] In 1895 the United States Supreme Court, in its ruling in Pollock v. Farmers' Loan & Trust Co., held a tax based on receipts from the use of property to be unconstitutional.

Like Roosevelt, Taft cited the Pollock decision[87] and gave a major speech in June 1909 regarding the Income Tax.

429 (Note: The Glenshaw Glass case was an interpretation of the definition of "gross income" in section 22 of the Internal Revenue Code of 1939.

We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income.[93]: pp.

The Court in that case noted that in enacting taxation legislation, Congress "chose not to return to the inclusive language of the Tariff Act of 1913, but, specifically, 'in the interest of simplicity and ease of administration,' confined the obligation to withhold [income taxes] to 'salaries, wages, and other forms of compensation for personal services'" and that "committee reports ... stated consistently that 'wages' meant remuneration 'if paid for services performed by an employee for his employer'".[93]: p.

1971), a couple had lost their home to a fire, and had received compensation for their loss from the insurance company, partly in the form of hotel costs reimbursed.

The court acknowledged the authority of the IRS to assess taxes on all forms of payment, but did not permit taxation on the compensation provided by the insurance company, because unlike a wage or a sale of goods at a profit, this was not a gain.

United States tax law attempts to define a comprehensive[clarification needed] system of measuring income in a complex economy.

Even venerable legal scholars like Judge Learned Hand have expressed amazement and frustration with the complexity of the U.S. income tax laws.

2, 167, 169 (December 1947), Judge Hand wrote: In my own case the words of such an act as the Income Tax ... merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception—couched in abstract terms that offer [me] no handle to seize hold of [and that] leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time.

I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.

Also, in the United States, income tax laws are often used by legislatures as policy instruments for encouraging numerous undertakings deemed socially useful — including the buying of life insurance, the funding of employee health care and pensions, the raising of children, home ownership, and the development of alternative energy sources and increased investment in conventional energy.

Special tax provisions granted for any purpose increase complexity, irrespective of the system's flatness or lack thereof.