Tax law is the body of law that establishes how taxes are imposed and regulated by the government. A tax is defined as a tariff on economic transactions by individuals and corporations. Taxes are used to produce government revenue and support government programs and initiatives. Taxes are imposed by both the federal government and individual state governments. Tax laws are codified by the federal government in the Internal Revenue Code of 1986, which appears as Title 26 of the United States Code. Individual states have codified their tax systems within state statutes. While a variety of taxes exist, the most significant taxes within tax law include the income tax, social security tax, estate and gift taxes, property tax and sales and use taxes.
Personal and corporate income taxes are the primary source of revenue for the federal government. The Sixteenth Amendment of the United States Constitution authorizes Congress to tax "incomes from whatever source derived." Today, the federal income tax has been codified in Section 61 of Title 26 of the United States Code. All citizens, both individuals and corporations, including those who do not live in the United States, are subject to the federal income tax.
Calculating Income Tax
"Regular" income taxes are calculated by taking a percentage of the taxpayer's income, with higher incomes being taxed at a higher rate. This is called a "progressive" tax system. Taxpayers often deduct certain designated items and amounts from their income to reduce the total percentage of income that is taxed. Additionally, many taxpayers are eligible for various tax credits, which reduce the total amount of taxes owed. Income may also be calculated according to the "Alternative Minimum Tax" (AMT). The AMT was designed to prevent those with high incomes from using loopholes to avoid federal taxation. Income under the AMT is calculated without regard to tax preferences, and with a limited number of exemptions and deductions. This income base, which is higher than the income base calculated by "regular" income taxes, is then taxed in two fixed rates, with the taxpayer paying the higher of the two amounts. The AMT has been criticized on a number of different bases, and Congress has continued to modify its structure. Many states also tax income, with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. State income taxes are generally calculated in the same manner as federal income taxes, with certain state-specific modifications.
Social Security Tax
The Social Security tax is codified in the Federal Insurance and Contributions Act (FICA). The Social Security Tax is applied only to earned income, which is income derived from employment. Interest from investments, rents, etc. is not subject to the Social Security tax. The tax is comprised of a fixed percentage of an employee's salary paid by the employer, and an equal percentage paid by the employee. Revenue from the Social Security tax is used to support federal social security programs.
Estate and Gift Taxes
Property owned by an individual at the time of their death is taxed as an estate tax. The Federal Estate Tax can be found in Section 2001 of Title 26 of the United States Code. Because the estate tax is imposed upon the individual's entire estate at the time of death, the tax encourages individuals to disperse their property before they die. Wealth transfers made before death are subject to gift taxes under Section 2501 of Title 26. However, each taxpayer is entitled to transfer tax-free a certain amount of money or property as a gift each year.
Property taxes are frequently levied by local governments to generate revenue for schools, road maintenance, etc. Property taxes are applied to most real and personal property owned by taxpayers. Household items are generally exempt from property taxes, while other objects of value (including automobiles, works of art, etc.) are often subject to property tax.
Sales and Use Tax
Local governments in most states also impose fixed sales and use taxes. Thus, items purchased within the state are subject to a fixed rate of taxation. The rates of sales and use taxes vary between states and sometimes even between counties within a state.
Roberts et al v. UBS AG et al
May 3, 2012
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