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TAX LAW

Tax law is the codified system of laws that describes government levies on economic transactions, commonly called taxes.

Major issues

Primary taxation issues in the United States would include taxes on: income, capital gains, retirement accounts, estates, gifts, corporations, LLCs, partnerships, or taxes on specific investment products or types.

Tax education from law schools

In law schools, "tax law" is a subdiscipline and area of specialist study. Tax law specialists are often employed in consultative roles, and may also be involved in litigation. Many law schools require about 50 credit hours of study with another 30 hours of electives. Law students pick and choose available courses on which to focus before graduation with the J.D. degree in the United States. This freedom allows law students to take many tax courses such as federal taxation, estate and gift tax, and estates and successions before completing the Juris Doctor and taking the bar exam in a particular U.S. state.

There are many fine LLM or Masters in Laws Graduate programs in the United States. Many of these programs offer the opportunity to focus on domestic and international taxation. Most LLM programs require that the candidate be a graduate of an accredited law school.

Tax education from business school programs

There are hundreds of accredited business schools in the USA. Many are accredited by the AACSB or ACBSP or recognized by AAFM. These undergraduate or graduate programs may allow the student to major or graduate with a tax related degree such as a Masters in Taxation. Also, the undergraduate focus on accounting would allow a student to go the CPA track. After a student completes the individual state or jurisdictional requirements for accounting, the applicant may sit for the CPA exam.

Taxation in the United States is a complex system which may involve payment to at least four different levels of government and many methods of taxation. United States taxation includes local government, possibly including one or more of municipal, township, district and county governments. It also includes regional entities such as school and utility, and transit districts as well as including state and federal government.

History

The first federal statute imposing the legal obligation to pay a federal income tax was adopted by Congress in 1862, to pay for the Civil War. The 1862 law levied a 3% tax on incomes above $600, rising to 5% for incomes above $10,000. Rates were raised in 1864. This income tax was repealed in 1872, but a new income tax statute was enacted as part of the 1894 Tariff Act. However, in 1895 the Supreme Court struck down a portion of the statute as unconstitutional — specifically, the tax on income from property — as an unapportioned direct tax.

At that time, the United States Constitution specified that Congress could impose a "direct" tax only if the law apportioned that tax among the states according to each state's census population. In its 1895 decision the Supreme Court held that a tax on income from property was a direct tax under the Constitution, and so had to be apportioned.

The apportionment requirement made income taxes on property practically impossible, and Congress did not want to limit the income tax solely to a tax on wages. Therefore, in 1909 Congress proposed the Sixteenth Amendment, which became part of the Constitution in 1913 when it was ratified by the required number of states. The Amendment modified the requirement for apportionment of direct taxes by exempting all income taxes—whether considered direct or indirect—from the apportionment requirement. Congress re-adopted the income tax that same year, levying a 1% tax on net personal incomes above $3,000, with a 6% surtax on incomes above $500,000. References in the Internal Revenue Code to corporate earnings and profit before and after February 1913 for characterization as dividend for shareholders are there to provide a belts and suspenders protection for the validity of the tax on shareholders. By 1918, the top rate of the income tax was increased to 77% (on income over $1,000,000) to finance World War I. The top marginal tax rate was reduced to 58% in 1922, to 25% in 1925, and finally to 24% in 1929. In 1932 the top marginal tax rate was increased to 63% during the Great Depression and steadily increased, reaching 94% (on all income over $200,000) in 1945. Top marginal tax rates stayed near or above 90% until 1964 when the top marginal tax rate was lowered to 70%. The top marginal tax rate was lowered to 50% in 1982 and eventually to 28% in 1988. During World War II, Congress introduced payroll withholding and quarterly tax payments.

At first the income tax was incrementally expanded by the Congress of the United States, and then inflation automatically raised most persons into tax brackets formerly reserved for the wealthy until income tax brackets were adjusted for inflation. Income tax now applies to almost ⅔ of the population. The lowest earning workers, especially those with dependents, pay no income taxes as a group and actually get a small subsidy from the federal government because of child credits and the Earned Income Tax Credit.

Some lower income individuals pay a proportionately higher share of payroll taxes for Social Security and Medicare than do some higher income individuals in terms of the effective tax rate. All income earned up to a point, adjusted annually for inflation ($94,200 for the year 2006 and $97,500 for the year 2008) is taxed at 7.65% (consisting of the 6.2% Social Security tax and the 1.45% Medicare tax) on the employee with an addition 7.65% in tax incurred by the employer. The annual limitation amount is sometimes called the "Social Security tax wage base amount" or "Contribution and Benefit Base." Above the annual limit amount, only the 1.45% Medicare tax is imposed. In terms of the effective rate, this means that a worker earning $20,000 for 2006 pays at a 7.65% effective rate ($1,530) while a worker earning $200,000 pays at an effective rate of about 4.37% ($8,740).

Self employed people pay the entire 15.3%, although they are allowed to deduct one-half of this amount from their total income when they file income taxes.[4] Above these payroll taxes presumably pay into the Social Security Trust Fund and Medicare Trust Funds that they will then draw on when the worker grows older.

The federal government is now financed primarily by personal and corporate income taxes. While it was originally funded via tariffs upon imported goods, tariffs now represent only a minor portion of federal revenues. There are also non-tax fees to recompense agencies for services or to fill specific trust funds such as the fee placed upon airline tickets for airport expansion and air traffic control. Often the receipts intended to be placed in "trust" funds are used for other purposes, with the government posting an IOU ('I owe you') in the form of a federal bond or other accounting instrument, then spending the money on unrelated current expenditures.

The federal government collects several specific taxes in addition to the general income tax. Social Security and Medicare are large social support programs which are funded by taxes on personal earned income. Estate taxes are levied on inheritance. Net long-term capital gains as well as certain types of qualified dividend income are taxed preferentially.

Federal excise taxes are applied to specific items such as motor fuels, tires, telephone usage, tobacco products, and alcoholic beverages. Excise taxes are often, but not always, allocated to special funds related to the object or activity taxed.