Introduction to the Statute
This course is Federal Income Tax. That means we are going to be very specific about what type of tax we will discuss. Taxes, as outlined by statue in the Internal Revenue Code (IRC) is title 26 of the USC. That is, any reference to taxes are found in 26 USC § ___. This semester will be more specific that that. Title 26 has Subtitles. We will focus on Subtitle A. Income Taxes. There will be a brief spell into Subtitle F. Procedure and Administration. Each Subtitle has chapters. In Subtitle A, we will only focus on Chapter 1, Normal Taxes and Surtaxes. This chapter has 22 parts (then even more subparts) that we will cover throughout the course.
Tax Rates and Progressivity
Focus on 26 USC § 1(a)-(d), (f)(1)-(2), (i)-(j). Tax imposed.
Income tax is progressive. This means that as your income grows, so does the rate you are taxed at. Consider the following:
- Income level of 0 to $10,275 is taxed at a 10% rate.
- Level 10,276 to $41,775 is taxed at 12%
- And so forth as outlined in 26 USC § 1(j).
When people call for a “tax cut” they are instead asking to flatten this progressive rate. That is, a person will stay in the same taxible bracket, even as their income begins to increase. This is because you are not taxed at the higher rate until you have reached the next step in the bracket.
As such, your tax is determined by two things: (1) the amount of your income and (2)
This rate is also marginal. That is, you do not pay the percentage for all of your income. Instead, you pay a margin of the tax increments and only pay the percent listed in the marginal tax rate when you move into the bracket.
Arguments Against Progressivity
First, progressivity tends to create complexity in the tax system. A simple flat tax rate is easier to manage.
Second, progressivity provides an incentive against individuals working. If less work means you are taxed less, people may choose to take only enough work to keep them in the top range of their bracket without going into the next one. This hampers society from extra labor.
Arguments For Progressively.
On the other hand, a more progressive tax system (a tax system with more brackets) is designed to help the poor feel less pain for their taxes and the wealthy to feel more pain for their taxes. That is, both the poor and the wealthy should feel the same amount of pain. When you have more money, spending a larger percent of the money tends to have less mental strain so it is fair to tax the wealthy at a higher percentage (so the argument goes).
Another argument for taxing the wealthy more is that their wealth provides additional access to benefits taxes pay for. If they are using the resources more, than they should also pay for the additional use (again, so the argument goes).
Finally, progressivity is a form of wealth redistribution. If the wealthy are taxed at a higher rate to fund programs that support the less financially stable, then wealth is being redistributed from the wealthy to the needy.
Different Tax Principles
- Equal Benefit Principle: This is a tax, called a head tax, where everyone pays the same dollar amount in taxes. The con of this is that a lower income person feels much more pain (or may not be able to pay) the tax than a higher income person.
- Benefit Principle: A tax where people pay based on what benefits they receive. However, this does not work because people on a practical level will not want every action to be measured.
- Standard of Living Principle: A tax where people pay based on what they use. This princniple generally does not work because people will use less resources to avoid the tax (dampening the economy).
- Ability to Pay: This is the system we have generally adopted. That is, people should be taxed based on their economic resources.
Filing Status
Focus on 26 USC §§ 1(a)-(d), (f)(8), (j); 2; 7703(a)
Married Filing Jointly
Married filing jointly arose because different states would have a different rule for what was owned by a party. States with community property would divide married property equally. No community property states would tax each individual seperately. The issue with this is that if the parties have a large discrepancy in income, in states where there are no community property laws, taxes are higher. To make it fair for all married couples throughout the United States, the code allowed married couples to file jointly, regardless of whether the state had community property laws or not.
A few other rules:
- You can file jointly if you are married any time during the years, even if it is december 31st.
- You can no longer file jointly for the year you become legally separated.
- Both this first and second rule keeps the statute from asking about the intent of the marriage or seperation.
- If a spouse dies and the couple had kids, the surviving spouse can continue to file jointly for the year of the deceased spouse and the next two years.
- If a spouse dies and the couple had no kids, the survivng spouse can only continue to file jointly for the year of the deceased spouse’s death.
Head of Household
Head of household is an individual who is the principal resident of a home (not married or a surviving spouse) and has at least one dependant for half of the year. These can include children, stepchildren, neices and nephews, grandchildren, etc.
Unmarried and Not Head of Household
Taxed at a higher rate than Head of Household because there is no need to care for dependants.
Married Filing Separately
A married couple may choose to file separately. The tax rates are basically split in half of filing jointly (because each spouse will file). This method is primarily only used for spouses that has similar earnings. Spouses with a large discrepancy between earnings are better off filing jointly.
Where to Bring your Tax Claim
There are three potential forums to dispute claims against your tax:
- Tax court: Appeals go to the U.S. Court of Appeals. There is no need to pay the required tax before challenging. However, there is no jury (could be a pro or con).
- Court of federal claims: Appeals go to the Federal Circuit. These are only refund cases (pay the tax then object). Again, there is no jury.
- U.S. District Court: Appeals go to the U.S. Court of Appeals. These are also only refund cases. However, there is the option of a jury trial.
A lawyer needs to examine the pros and cons of each court before filing. Each may have different case law. Another thing to consider is that very few cases are initiated in the U.S. District Courts.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
