IRS Tax Tip 2011-76, April 18, 2011
Now that the federal income tax filing deadline is in your rear-view mirror, what happens after you file? A lot of taxpayers have post tax-filing questions such as what records do I keep and more importantly, “Where’s my Refund?” The IRS has answers for you below.
Refund Information
You can go online to check the status of your 2010 refund 72 hours after IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2010 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:
• Go to http://irs.gov and click on “Where’s My Refund”
• Call 800-829-4477~24 hours a day, seven days a week, for automated refund information
• Call 800-829-1954 during the hours shown in your tax form instructions
• Use IRS2Go. If you have an Apple iPhone or iTouch or an Android device you can download an application to check the status of your refund.
What Records Should I Keep?
Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRAs and business or rental property — should be kept longer.
You should keep copies of tax returns you have filed and the tax forms package as part of your records. They may be helpful in amending already filed returns or preparing future returns.
Change of Address
If you move after you filed your return, send Form 8822, Change of Address, to the Internal Revenue Service. If you are expecting a paper refund check, you should also file a change of address with the U.S. Postal Service.
What If I Made a Mistake?
Errors may delay your refund or result in notices being sent to you. If you discover an error on your return, you can correct your return by filing an amended return using Form 1040X, Amended U.S. Individual Income Tax Return.
Visit the IRS website at http://www.irs.gov for more information on refunds, recordkeeping, address changes and amended returns.
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Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
Saturday, April 16, 2011
Tuesday, April 12, 2011
Colonial Income Tax Helps Celebrate the 150th Year of The Start of the Civil War With A Recount of Historical Highlights of The Nation’s Tax System
Colonial Income Tax Helps Celebrate the 150th Year of The Start of the Civil War With A Recount of Historical Highlights of The Nation’s Tax System
1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.
1867 - Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.
1872 - Income tax repealed.
1894 - The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.
1895 - Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.
1909 - President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.
1913 - As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "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." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.
1918 - The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.
1919 - The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.
1931 - The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.
1933 - Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.
1942 - The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.
1943 - Congress passed the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.
1944 - Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.
1952 - President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.
1953 - President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.
1954 - The filing deadline for individual tax returns changed from March 15 to April 15.
1961 - The Computer Age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.
1965 - IRS instituted its first toll-free telephone site.
1972 - The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.
1974 - Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.
1986 - Limited electronic filing began. President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The Act codified the federal tax laws for the third time since the Revenue Act of 1918.
1992 - Taxpayers who owed money were allowed to file returns electronically.
1998 - Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.
2000 - IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.
2001 - IRS administered a mid-year tax refund program to provide advance payments of a tax rate reduction.
2003 - IRS administered another mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit. Electronic filing reached a new high - 52.9 million tax returns, more than 40 percent of all individual returns.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.
1867 - Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.
1872 - Income tax repealed.
1894 - The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.
1895 - Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.
1909 - President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.
1913 - As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "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." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.
1918 - The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.
1919 - The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.
1931 - The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.
1933 - Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.
1942 - The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.
1943 - Congress passed the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.
1944 - Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.
1952 - President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.
1953 - President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.
1954 - The filing deadline for individual tax returns changed from March 15 to April 15.
1961 - The Computer Age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.
1965 - IRS instituted its first toll-free telephone site.
1972 - The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.
1974 - Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.
1986 - Limited electronic filing began. President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The Act codified the federal tax laws for the third time since the Revenue Act of 1918.
1992 - Taxpayers who owed money were allowed to file returns electronically.
1998 - Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.
2000 - IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.
2001 - IRS administered a mid-year tax refund program to provide advance payments of a tax rate reduction.
2003 - IRS administered another mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit. Electronic filing reached a new high - 52.9 million tax returns, more than 40 percent of all individual returns.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
Colonial Income Tax Service Located at 700 Delaware Street,New Castle Delaware 19720: Colonial Income Tax Helps Celebrate the 150th Year...
Colonial Income Tax Service Located at 700 Delaware Street,New Castle Delaware 19720: Colonial Income Tax Helps Celebrate the 150th Year...: "Colonial Income Tax Helps Celebrate the 150th Year of The Start of the Civil War With A Recount of Historical Highlights of The Nation’s Tax..."
Colonial Income Tax Helps Celebrate the 150th Year of The Start of the Civil War With A Recount of Historical Highlights of The Nation’s Tax System
Colonial Income Tax Helps Celebrate the 150th Year of The Start of the Civil War With A Recount of Historical Highlights of The Nation’s Tax System
1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.
1867 - Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.
1872 - Income tax repealed.
1894 - The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.
1895 - Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.
1909 - President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.
1913 - As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "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." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.
1918 - The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.
1919 - The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.
1931 - The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.
1933 - Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.
1942 - The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.
1943 - Congress passed the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.
1944 - Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.
1952 - President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.
1953 - President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.
1954 - The filing deadline for individual tax returns changed from March 15 to April 15.
1961 - The Computer Age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.
1965 - IRS instituted its first toll-free telephone site.
1972 - The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.
1974 - Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.
1986 - Limited electronic filing began. President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The Act codified the federal tax laws for the third time since the Revenue Act of 1918.
1992 - Taxpayers who owed money were allowed to file returns electronically.
1998 - Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.
2000 - IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.
2001 - IRS administered a mid-year tax refund program to provide advance payments of a tax rate reduction.
2003 - IRS administered another mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit. Electronic filing reached a new high - 52.9 million tax returns, more than 40 percent of all individual returns.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.
1867 - Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.
1872 - Income tax repealed.
1894 - The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.
1895 - Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.
1909 - President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.
1913 - As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "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." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.
1918 - The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.
1919 - The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.
1931 - The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.
1933 - Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.
1942 - The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.
1943 - Congress passed the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.
1944 - Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.
1952 - President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.
1953 - President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.
1954 - The filing deadline for individual tax returns changed from March 15 to April 15.
1961 - The Computer Age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.
1965 - IRS instituted its first toll-free telephone site.
1972 - The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.
1974 - Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.
1986 - Limited electronic filing began. President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The Act codified the federal tax laws for the third time since the Revenue Act of 1918.
1992 - Taxpayers who owed money were allowed to file returns electronically.
1998 - Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.
2000 - IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.
2001 - IRS administered a mid-year tax refund program to provide advance payments of a tax rate reduction.
2003 - IRS administered another mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit. Electronic filing reached a new high - 52.9 million tax returns, more than 40 percent of all individual returns.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
Colonial Income Tax Service Located at 700 Delaware Street,New Castle Delaware 19720: Colonial Income Tax Service Tips for Managing Your...
Colonial Income Tax Service Located at 700 Delaware Street,New Castle Delaware 19720: Colonial Income Tax Service Tips for Managing Your...: "Tips for Managing Your Tax Records After you file your taxes, you will have many records that may help document items on your tax return. ..."
Colonial Income Tax Service Tips for Managing Your Tax Records
Tips for Managing Your Tax Records
After you file your taxes, you will have many records that may help document items on your tax return. You will need these documents should the IRS select your return for examination. Here are five tips from the IRS about keeping good records.
Normally, tax records should be kept for three years.
Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
After you file your taxes, you will have many records that may help document items on your tax return. You will need these documents should the IRS select your return for examination. Here are five tips from the IRS about keeping good records.
Normally, tax records should be kept for three years.
Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
Sunday, April 10, 2011
Colonial Tax Tips 30 Last-Minute Tax Tips The deadline is fast approaching—but don't file your return until you've grabbed every last break. Here's a guide.
Colonial Tax Tips 30 Last-Minute Tax Tips The deadline is fast approaching—but don't file your return until you've grabbed every last break. Here's a guide.
First, some good news: This year's deadlines are unusually late. Because April 15 coincided with a District of Columbia holiday, 2010 tax payments are due Monday, April 18. The deadline for those with six-month filing extensions is Oct. 17.
Now for some bad news: Audits on wealthier taxpayers are likely to rise, say tax experts, while refund amounts are merely holding steady. As of mid-March, just over half of all 140 million-plus individual returns had been filed, slightly behind the total for last year, and the average refund continued to be about $3,000.
If you are racing to meet the April 18 deadline, here are some last-minute tips gathered from a broad array of tax preparers. We have identified eight deductions that many people overlook, eight audit triggers, six common mistakes, five reminders for investors and three ways to cut your tax bill right now. Plus, we offer a heads-up on the perils of offshore accounts.
8 Overlooked Deductions of Credits
1. State-tax refunds for AMT taxpayers. Taxpayers often forget that state tax refunds aren't taxable to those who owe alternative minimum tax, or AMT, for the same tax year, as long as the amount of the refund is less than the amount of state income tax disallowed under AMT.
2. Charitable donations, Part I. Donors may not deduct labor or time, but they may deduct expenses such as mileage or uniforms. Board members or chosen representatives also may deduct unreimbursed expenses for attending a conference or meeting. For details, see IRS publication 526.
3. Charitable donations, Part II. Employees who give to charities via payroll deductions at work frequently forget to include them on their personal return. "The number is not on the W-2 and there's no letter," says Melissa Labant, an expert with the American Institute of CPAs.
4. Health-insurance premiums for the self-employed. For 2010 only, people who are self-employed and have deductible health-insurance premiums may also deduct them against Social Security taxes on Schedule SE. For 2010 and after, these same taxpayers may deduct premiums for a child under age 27 at the end of the year, even if the child isn't a dependent for tax purposes.
5. Medical expenses. The disallowance equal to 7.5% of adjusted gross income is a high hurdle, but those who qualify shouldn't overlook all possible expenses, listed in IRS publication 502. Ms. Labant advises married couples to consider filing separately if one partner has high bills. "This is one of the only times that filing separately can lower the total tax bill," she says.
6. Sales-tax deduction in lieu of income taxes. This provision, which Congress has extended through 2011, allows itemized deductions for state and local sales tax instead of state and local income taxes. Taking this is a no-brainer in states without an income tax, and it may work for others if state income taxes are relatively low but a taxpayer had big-ticket purchases such as a car, boat or engagement ring, according to H&R Block's Tax Institute.
7. Moving expenses. Taxpayers who moved more than 50 miles for work and stayed employed may often deduct reasonable moving expenses. No itemization is necessary. See IRS publication 521.
8. Domestic Production Deduction. This generous benefit for having a qualified business in the U.S. can be claimed by sole proprietors, partnerships and corporations; it can even apply to farmers. It is easy to miss, says Chris Hesse, a CPA with LarsonAllen LLP in Minneapolis, "because no checks are written and tax-prep software may be unaware of it."
8 Audit Triggers
1. Mortgage-interest deduction over $50,000.Taxpayers are allowed to deduct interest on qualified loans up to $1 million (plus $100,000 of home-equity debt), and $50,000 is roughly equal to the annual interest on a $1 million loan at 5%. "Clients with larger payments are sometimes too busy to refinance," says David Lifson of Crowe Horwath CPAs in New York, "but they are likely to hear from the IRS."
2. Large charitable contributions, especially of noncash items. Taxpayers must have proof for every dollar of donation deductions, and sometimes appraisals. See IRS publications 526 and 561.
3. Schedule C business losses more than two years in a row. Because these losses are deductible against other income, losses in three or more consecutive years arouse the IRS's suspicion that they are nondeductible "hobby losses." A small profit raises taxes very little and diverts attention, says Robert Gard of Gard & LaFreniere, an Atlanta-area CPA firm.
4. Home-buyer tax credit. Congress has passed three versions of this stimulus since 2008, and research by official watchdogs showed substantial fraud in the initial one. Later versions require taxpayers to provide documents proving they qualify for the break.
5. Rental real estate, especially with losses. A perennial red flag, especially if the taxpayer claims to be a real-estate professional, because the losses are then deductible against ordinary income. The IRS will be even more suspicious if the wages and professional activities are performed by a single person or one partner of a couple, because professional status often requires a 750 hour-a-year commitment, says James Guarino of Boston-area CPA firm Moody, Famiglietti & Andronico.
6. Payouts to subchapter S owners who earn little or no compensation. Owners of closely held businesses using subchapter S sometimes pay themselves in dividends and lowball their wages in order to minimize the 15.3% payroll tax. It's difficult for the IRS to police, but those who take too little compensation are asking for IRS attention, Mr. Gard says. One rule of thumb: The ratio of pay to profits should be 70% or higher.
7. Large deductions in relation to income, especially for business travel and entertainment. What is too large? That's hard to say, and the IRS zealously guards its audit formulas. See IRS publication 463.
8. Home office—maybe.Years ago, the IRS was famous for challenging home-office deductions, but has backed off lately, say some experts. See IRS publication 587.
6 Common Errors
1. Overstating charitable deductions. If you attend a charity event, you may deduct only a portion of the ticket cost, which is usually stated in a letter from the charity. This is true even if you don't attend, unless you donate the ticket back to the charity beforehand.
2. Deducting mortgage "points" incorrectly. Mortgage fees are deductible upfront only for a first mortgage. Points on refinancings must be deducted over the life of the loan.
3. Overlooking the "kiddie" tax. Children up to age 23 often owe tax at their parent's rate on investment income over $1,900. Information from the parent(s)' return is required to complete the child's, so it should be finished first. For details, see IRS publication 929.
4. Missing the Making Work Pay credit. Last year was the final one for this refundable, dollar-for-dollar credit of up to $400 for individuals or $800 for married couples earning less than $190,000 (single: $95,000). Although withholding was adjusted to reflect this credit, taxpayers also need to file Schedule M to claim it.
5. Omitting small interest payments. Banks and other firms don't have to provide a 1099 form for amounts less than $10. So why do such small amounts matter? Because they still are taxable income. An IRS auditor may note the discrepancy, and "any unreported income makes the IRS nervous and can lead to more questions," says Ms. Labant of the AICPA.
6. Roth conversions and filing extensions. Taxpayers who converted regular IRAs to Roth accounts in 2010 have until Oct. 17 to reverse them. It may make sense to get a six-month filing extension, because if you already have filed and decide to reverse the conversion, you have to file an amended tax return.
Tax related identity theft affects tens of thousands of people every year. Kelsey Hubbard talks with Smartmoney's Jonnelle Marte about protecting your social security number and how taxpayers can detect if they've been a victim of fraud.
5 Tips for Investors
1. "Wash" sales. You can't take long-term capital losses on stock sales if you also buy shares 30 days before or after the sale. Exercising stock options counts as a purchase.
2. Dividends. Only "qualified" dividends get a top tax rate of 15%; others are taxed at ordinary income rates. Fortunately most dividends of stocks held longer than two months count as qualified, but check broker reports.
3. Losses. Long-term capital losses (those on investments held longer than a year) can be used to shelter an equal amount of gains. Up to $3,000 of excess can then be deducted against ordinary income per year, and what's left can carry forward indefinitely.
4. Employee stock. A discount is recorded on your W-2 form that should raise cost basis and lower taxes when the stock is sold. But this adjustment is often overlooked.
5. Incentive stock options. Watch out for alternative-minimum-tax consequences both on exercise and sale.
3 Ways to Cut Your Tax Bill Now
1. Regular IRA. You may deduct contributions to a regular IRA made by April 18. For more details on who is eligible, see IRS publication 590. Note: Taxpayers 50 and older can put in a bit more.
2. SEP IRA and other pension plans. Unlike with regular IRAs, deductible contributions may be made until Oct. 17 for those with filing extensions.
3. Health Savings Accounts (HSAs). You may deduct up to $6,150 per family ($3,050 single) for an HSA if you had a qualifying high-deductible health plan in 2010. Contributions are due by April 18.
Offshore Accounts
The IRS is going after undeclared foreign accounts. Taxpayers with accounts totaling more than $10,000 at any one point during a year—this can include foreign trusts or the Canadian version of IRAs, among other things—must check a box on the tax return and file a special form with Treasury by June 30.
Not doing so risks draconian penalties that can swallow half of the account, and the rules don't always distinguish between taxevading fraudsters and expatriates or others with foreign accounts. "This is a detail taxpayers shouldn't miss," says Bryan Skarlatos, an attorney with Kostelanetz Fink in New York, "because you could wind up in jail.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
First, some good news: This year's deadlines are unusually late. Because April 15 coincided with a District of Columbia holiday, 2010 tax payments are due Monday, April 18. The deadline for those with six-month filing extensions is Oct. 17.
Now for some bad news: Audits on wealthier taxpayers are likely to rise, say tax experts, while refund amounts are merely holding steady. As of mid-March, just over half of all 140 million-plus individual returns had been filed, slightly behind the total for last year, and the average refund continued to be about $3,000.
If you are racing to meet the April 18 deadline, here are some last-minute tips gathered from a broad array of tax preparers. We have identified eight deductions that many people overlook, eight audit triggers, six common mistakes, five reminders for investors and three ways to cut your tax bill right now. Plus, we offer a heads-up on the perils of offshore accounts.
8 Overlooked Deductions of Credits
1. State-tax refunds for AMT taxpayers. Taxpayers often forget that state tax refunds aren't taxable to those who owe alternative minimum tax, or AMT, for the same tax year, as long as the amount of the refund is less than the amount of state income tax disallowed under AMT.
2. Charitable donations, Part I. Donors may not deduct labor or time, but they may deduct expenses such as mileage or uniforms. Board members or chosen representatives also may deduct unreimbursed expenses for attending a conference or meeting. For details, see IRS publication 526.
3. Charitable donations, Part II. Employees who give to charities via payroll deductions at work frequently forget to include them on their personal return. "The number is not on the W-2 and there's no letter," says Melissa Labant, an expert with the American Institute of CPAs.
4. Health-insurance premiums for the self-employed. For 2010 only, people who are self-employed and have deductible health-insurance premiums may also deduct them against Social Security taxes on Schedule SE. For 2010 and after, these same taxpayers may deduct premiums for a child under age 27 at the end of the year, even if the child isn't a dependent for tax purposes.
5. Medical expenses. The disallowance equal to 7.5% of adjusted gross income is a high hurdle, but those who qualify shouldn't overlook all possible expenses, listed in IRS publication 502. Ms. Labant advises married couples to consider filing separately if one partner has high bills. "This is one of the only times that filing separately can lower the total tax bill," she says.
6. Sales-tax deduction in lieu of income taxes. This provision, which Congress has extended through 2011, allows itemized deductions for state and local sales tax instead of state and local income taxes. Taking this is a no-brainer in states without an income tax, and it may work for others if state income taxes are relatively low but a taxpayer had big-ticket purchases such as a car, boat or engagement ring, according to H&R Block's Tax Institute.
7. Moving expenses. Taxpayers who moved more than 50 miles for work and stayed employed may often deduct reasonable moving expenses. No itemization is necessary. See IRS publication 521.
8. Domestic Production Deduction. This generous benefit for having a qualified business in the U.S. can be claimed by sole proprietors, partnerships and corporations; it can even apply to farmers. It is easy to miss, says Chris Hesse, a CPA with LarsonAllen LLP in Minneapolis, "because no checks are written and tax-prep software may be unaware of it."
8 Audit Triggers
1. Mortgage-interest deduction over $50,000.Taxpayers are allowed to deduct interest on qualified loans up to $1 million (plus $100,000 of home-equity debt), and $50,000 is roughly equal to the annual interest on a $1 million loan at 5%. "Clients with larger payments are sometimes too busy to refinance," says David Lifson of Crowe Horwath CPAs in New York, "but they are likely to hear from the IRS."
2. Large charitable contributions, especially of noncash items. Taxpayers must have proof for every dollar of donation deductions, and sometimes appraisals. See IRS publications 526 and 561.
3. Schedule C business losses more than two years in a row. Because these losses are deductible against other income, losses in three or more consecutive years arouse the IRS's suspicion that they are nondeductible "hobby losses." A small profit raises taxes very little and diverts attention, says Robert Gard of Gard & LaFreniere, an Atlanta-area CPA firm.
4. Home-buyer tax credit. Congress has passed three versions of this stimulus since 2008, and research by official watchdogs showed substantial fraud in the initial one. Later versions require taxpayers to provide documents proving they qualify for the break.
5. Rental real estate, especially with losses. A perennial red flag, especially if the taxpayer claims to be a real-estate professional, because the losses are then deductible against ordinary income. The IRS will be even more suspicious if the wages and professional activities are performed by a single person or one partner of a couple, because professional status often requires a 750 hour-a-year commitment, says James Guarino of Boston-area CPA firm Moody, Famiglietti & Andronico.
6. Payouts to subchapter S owners who earn little or no compensation. Owners of closely held businesses using subchapter S sometimes pay themselves in dividends and lowball their wages in order to minimize the 15.3% payroll tax. It's difficult for the IRS to police, but those who take too little compensation are asking for IRS attention, Mr. Gard says. One rule of thumb: The ratio of pay to profits should be 70% or higher.
7. Large deductions in relation to income, especially for business travel and entertainment. What is too large? That's hard to say, and the IRS zealously guards its audit formulas. See IRS publication 463.
8. Home office—maybe.Years ago, the IRS was famous for challenging home-office deductions, but has backed off lately, say some experts. See IRS publication 587.
6 Common Errors
1. Overstating charitable deductions. If you attend a charity event, you may deduct only a portion of the ticket cost, which is usually stated in a letter from the charity. This is true even if you don't attend, unless you donate the ticket back to the charity beforehand.
2. Deducting mortgage "points" incorrectly. Mortgage fees are deductible upfront only for a first mortgage. Points on refinancings must be deducted over the life of the loan.
3. Overlooking the "kiddie" tax. Children up to age 23 often owe tax at their parent's rate on investment income over $1,900. Information from the parent(s)' return is required to complete the child's, so it should be finished first. For details, see IRS publication 929.
4. Missing the Making Work Pay credit. Last year was the final one for this refundable, dollar-for-dollar credit of up to $400 for individuals or $800 for married couples earning less than $190,000 (single: $95,000). Although withholding was adjusted to reflect this credit, taxpayers also need to file Schedule M to claim it.
5. Omitting small interest payments. Banks and other firms don't have to provide a 1099 form for amounts less than $10. So why do such small amounts matter? Because they still are taxable income. An IRS auditor may note the discrepancy, and "any unreported income makes the IRS nervous and can lead to more questions," says Ms. Labant of the AICPA.
6. Roth conversions and filing extensions. Taxpayers who converted regular IRAs to Roth accounts in 2010 have until Oct. 17 to reverse them. It may make sense to get a six-month filing extension, because if you already have filed and decide to reverse the conversion, you have to file an amended tax return.
Tax related identity theft affects tens of thousands of people every year. Kelsey Hubbard talks with Smartmoney's Jonnelle Marte about protecting your social security number and how taxpayers can detect if they've been a victim of fraud.
5 Tips for Investors
1. "Wash" sales. You can't take long-term capital losses on stock sales if you also buy shares 30 days before or after the sale. Exercising stock options counts as a purchase.
2. Dividends. Only "qualified" dividends get a top tax rate of 15%; others are taxed at ordinary income rates. Fortunately most dividends of stocks held longer than two months count as qualified, but check broker reports.
3. Losses. Long-term capital losses (those on investments held longer than a year) can be used to shelter an equal amount of gains. Up to $3,000 of excess can then be deducted against ordinary income per year, and what's left can carry forward indefinitely.
4. Employee stock. A discount is recorded on your W-2 form that should raise cost basis and lower taxes when the stock is sold. But this adjustment is often overlooked.
5. Incentive stock options. Watch out for alternative-minimum-tax consequences both on exercise and sale.
3 Ways to Cut Your Tax Bill Now
1. Regular IRA. You may deduct contributions to a regular IRA made by April 18. For more details on who is eligible, see IRS publication 590. Note: Taxpayers 50 and older can put in a bit more.
2. SEP IRA and other pension plans. Unlike with regular IRAs, deductible contributions may be made until Oct. 17 for those with filing extensions.
3. Health Savings Accounts (HSAs). You may deduct up to $6,150 per family ($3,050 single) for an HSA if you had a qualifying high-deductible health plan in 2010. Contributions are due by April 18.
Offshore Accounts
The IRS is going after undeclared foreign accounts. Taxpayers with accounts totaling more than $10,000 at any one point during a year—this can include foreign trusts or the Canadian version of IRAs, among other things—must check a box on the tax return and file a special form with Treasury by June 30.
Not doing so risks draconian penalties that can swallow half of the account, and the rules don't always distinguish between taxevading fraudsters and expatriates or others with foreign accounts. "This is a detail taxpayers shouldn't miss," says Bryan Skarlatos, an attorney with Kostelanetz Fink in New York, "because you could wind up in jail.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
Colonial Income Tax 9 Points The IRS Wants You to Know About Amending
Colonial Income Tax 9 Points The IRS Wants You to Know About Amending
An amended tax return generally allows you to file again to correct your filing status, your income or to add deductions or credits you may have missed.
Here are nine points the IRS wants you to know about amending your federal income tax return.
1. Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended income tax return.
2. Use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. An amended return cannot be filed electronically, thus you must file it by paper.
3. Generally, you do not need to file an amended return due to math errors. The IRS will automatically make that correction. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS normally will send a request asking for those.
4. Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
5. If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS campus. The 1040X instructions list the addresses for the campuses.
6. If the changes involve another schedule or form, you must attach that schedule or form to the amended return.
7. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
8. If you owe additional 2010 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
9. Form 1040X was recently redesigned. Previously the form consisted of three columns; Column A-Original amount, Column B-Net change, and Column C-Correct amount. The redesigned form now has just one column where the Correct Amount is the only figure entered, making it easier to make changes to previously filed returns.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC’S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
An amended tax return generally allows you to file again to correct your filing status, your income or to add deductions or credits you may have missed.
Here are nine points the IRS wants you to know about amending your federal income tax return.
1. Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended income tax return.
2. Use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. An amended return cannot be filed electronically, thus you must file it by paper.
3. Generally, you do not need to file an amended return due to math errors. The IRS will automatically make that correction. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS normally will send a request asking for those.
4. Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
5. If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS campus. The 1040X instructions list the addresses for the campuses.
6. If the changes involve another schedule or form, you must attach that schedule or form to the amended return.
7. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
8. If you owe additional 2010 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
9. Form 1040X was recently redesigned. Previously the form consisted of three columns; Column A-Original amount, Column B-Net change, and Column C-Correct amount. The redesigned form now has just one column where the Correct Amount is the only figure entered, making it easier to make changes to previously filed returns.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC’S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
Friday, April 1, 2011
Colonial Income Tax Service Located at 700 Delaware Street,New Castle Delaware 19720: COLONIAL INCOME TAX HISTORY OF U.S. TAX SYSTEM
Colonial Income Tax Service Located at 700 Delaware Street,New Castle Delaware 19720: COLONIAL INCOME TAX HISTORY OF U.S. TAX SYSTEM: "COLONIAL INCOME TAX HISTORY OF U.S. TAX SYSTEM The federal, state, and local tax systems in the United States have been marked by significan..."
COLONIAL INCOME TAX HISTORY OF U.S. TAX SYSTEM
COLONIAL INCOME TAX HISTORY OF U.S. TAX SYSTEM
The federal, state, and local tax systems in the United States have been marked by significant changes over the years in response to changing circumstances and changes in the role of government. The types of taxes collected, their relative proportions, and the magnitudes of the revenues collected are all far different than they were 50 or 100 years ago. Some of these changes are traceable to specific historical events, such as a war or the passage of the 16th Amendment to the Constitution that granted the Congress the power to levy a tax on personal income. Other changes were more gradual, responding to changes in society, in our economy, and in the roles and responsibilities that government has taken unto itself
COLONIAL TIMES
For most of our nation's history, individual taxpayers rarely had any significant contact with Federal tax authorities as most of the Federal government's tax revenues were derived from excise taxes, tariffs, and customs duties. Before the Revolutionary War, the colonial government had only a limited need for revenue, while each of the colonies had greater responsibilities and thus greater revenue needs, which they met with different types of taxes. For example, the southern colonies primarily taxed imports and exports, the middle colonies at times imposed a property tax and a "head" or poll tax levied on each adult male, and the New England colonies raised revenue primarily through general real estate taxes, excises taxes, and taxes based on occupation.
England's need for revenues to pay for its wars against France led it to impose a series of taxes on the American colonies. In 1765, the English Parliament passed the Stamp Act, which was the first tax imposed directly on the American colonies, and then Parliament imposed a tax on tea. Even though colonists were forced to pay these taxes, they lacked representation in the English Parliament. This led to the rallying cry of the American Revolution that "taxation without representation is tyranny" and established a persistent wariness regarding taxation as part of the American culture.
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THE POST REVOLUTIONARY ERA
The Articles of Confederation, adopted in 1781, reflected the American fear of a strong central government and so retained much of the political power in the States. The national government had few responsibilities and no nationwide tax system, relying on donations from the States for its revenue. Under the Articles, each State was a sovereign entity and could levy tax as it pleased.
When the Constitution was adopted in 1789, the Founding Fathers recognized that no government could function if it relied entirely on other governments for its resources, thus the Federal Government was granted the authority to raise taxes. The Constitution endowed the Congress with the power to "…lay and collect taxes, duties, imposts, and excises, pay the Debts and provide for the common Defense and general Welfare of the United States." Ever on guard against the power of the central government to eclipse that of the states, the collection of the taxes was left as the responsibility of the State governments.
To pay the debts of the Revolutionary War, Congress levied excise taxes on distilled spirits, tobacco and snuff, refined sugar, carriages, property sold at auctions, and various legal documents. Even in the early days of the Republic, however, social purposes influenced what was taxed. For example, Pennsylvania imposed an excise tax on liquor sales partly "to restrain persons in low circumstances from an immoderate use thereof." Additional support for such a targeted tax came from property owners, who hoped thereby to keep their property tax rates low, providing an early example of the political tensions often underlying tax policy decisions.
Though social policies sometimes governed the course of tax policy even in the early days of the Republic, the nature of these policies did not extend either to the collection of taxes so as to equalize incomes and wealth, or for the purpose of redistributing income or wealth. As Thomas Jefferson once wrote regarding the "general Welfare" clause:
To take from one, because it is thought his own industry and that of his father has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, "to guarantee to everyone a free exercise of his industry and the fruits acquired by it."
With the establishment of the new nation, the citizens of the various colonies now had proper democratic representation, yet many Americans still opposed and resisted taxes they deemed unfair or improper. In 1794, a group of farmers in southwestern Pennsylvania physically opposed the tax on whiskey, forcing President Washington to send Federal troops to suppress the Whiskey Rebellion, establishing the important precedent that the Federal government was determined to enforce its revenue laws. The Whiskey Rebellion also confirmed, however, that the resistance to unfair or high taxes that led to the Declaration of Independence did not evaporate with the forming of a new, representative government.
During the confrontation with France in the late 1790's, the Federal Government imposed the first direct taxes on the owners of houses, land, slaves, and estates. These taxes are called direct taxes because they are a recurring tax paid directly by the taxpayer to the government based on the value of the item that is the basis for the tax. The issue of direct taxes as opposed to indirect taxes played a crucial role in the evolution of Federal tax policy in the following years. When Thomas Jefferson was elected President in 1802, direct taxes were abolished and for the next 10 years there were no internal revenue taxes other than excises.
To raise money for the War of 1812, Congress imposed additional excise taxes, raised certain customs duties, and raised money by issuing Treasury notes. In 1817 Congress repealed these taxes, and for the next 44 years the Federal Government collected no internal revenue. Instead, the Government received most of its revenue from high customs duties and through the sale of public land.
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THE CIVIL WAR
When the Civil War erupted, the Congress passed the Revenue Act of 1861, which restored earlier excises taxes and imposed a tax on personal incomes. The income tax was levied at 3 percent on all incomes higher than $800 a year. This tax on personal income was a new direction for a Federal tax system based mainly on excise taxes and customs duties. Certain inadequacies of the income tax were quickly acknowledged by Congress and thus none was collected until the following year.
By the spring of 1862 it was clear the war would not end quickly and with the Union's debt growing at the rate of $2 million daily it was equally clear the Federal government would need additional revenues. On July 1, 1862 the Congress passed new excise taxes on such items as playing cards, gunpowder, feathers, telegrams, iron, leather, pianos, yachts, billiard tables, drugs, patent medicines, and whiskey. Many legal documents were also taxed and license fees were collected for almost all professions and trades.
The 1862 law also made important reforms to the Federal income tax that presaged important features of the current tax. For example, a two-tiered rate structure was enacted, with taxable incomes up to $10,000 taxed at a 3 percent rate and higher incomes taxed at 5 percent. A standard deduction of $600 was enacted and a variety of deductions were permitted for such things as rental housing, repairs, losses, and other taxes paid. In addition, to assure timely collection, taxes were "withheld at the source" by employers.
The need for Federal revenue declined sharply after the war and most taxes were repealed. By 1868, the main source of Government revenue derived from liquor and tobacco taxes. The income tax was abolished in 1872. From 1868 to 1913, almost 90 percent of all revenue was collected from the remaining excises.
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THE 16th AMENDMENT
Under the Constitution, Congress could impose direct taxes only if they were levied in proportion to each State's population. Thus, when a flat rate Federal income tax was enacted in 1894, it was quickly challenged and in 1895 the U.S. Supreme Court ruled it unconstitutional because it was a direct tax not apportioned according to the population of each state.
Lacking the revenue from an income tax and with all other forms of internal taxes facing stiff resistance, from 1896 until 1910 the Federal government relied heavily on high tariffs for its revenues. The War Revenue Act of 1899 sought to raise funds for the Spanish-American War through the sale of bonds, taxes on recreational facilities used by workers, and doubled taxes on beer and tobacco. A tax was even imposed on chewing gum. The Act expired in 1902, so that Federal receipts fell from 1.7 percent of Gross Domestic Product to 1.3 percent.
While the War Revenue Act returned to traditional revenue sources following the Supreme Court's 1895 ruling on the income tax, debate on alternative revenue sources remained lively. The nation was becoming increasingly aware that high tariffs and excise taxes were not sound economic policy and often fell disproportionately on the less affluent. Proposals to reinstate the income tax were introduced by Congressmen from agricultural areas whose constituents feared a Federal tax on property, especially on land, as a replacement for the excises.
Eventually, the income tax debate pitted southern and western Members of Congress representing more agricultural and rural areas against the industrial northeast. The debate resulted in an agreement calling for a tax, called an excise tax, to be imposed on business income, and a Constitutional amendment to allow the Federal government to impose tax on individuals' lawful incomes without regard to the population of each State.
By 1913, 36 States had ratified the 16th Amendment to the Constitution. In October, Congress passed a new income tax law with rates beginning at 1 percent and rising to 7 percent for taxpayers with income in excess of $500,000. Less than 1 percent of the population paid income tax at the time. Form 1040 was introduced as the standard tax reporting form and, though changed in many ways over the years, remains in use today.
One of the problems with the new income tax law was how to define "lawful" income. Congress addressed this problem by amending the law in 1916 by deleting the word "lawful" from the definition of income. As a result, all income became subject to tax, even if it was earned by illegal means. Several years later, the Supreme Court declared the Fifth Amendment could not be used by bootleggers and others who earned income through illegal activities to avoid paying taxes. Consequently, many who broke various laws associated with illegal activities and were able to escape justice for these crimes were incarcerated on tax evasion charges.
Prior to the enactment of the income tax, most citizens were able to pursue their private economic affairs without the direct knowledge of the government. Individuals earned their wages, businesses earned their profits, and wealth was accumulated and dispensed with little or no interaction with government entities. The income tax fundamentally changed this relationship, giving the government the right and the need to know about all manner of an individual or business' economic life. Congress recognized the inherent invasiveness of the income tax into the taxpayer's personal affairs and so in 1916 it provided citizens with some degree of protection by requiring that information from tax returns be kept confidential.
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WORLD WAR I AND THE 1920’s
The entry of the United States into World War I greatly increased the need for revenue and Congress responded by passing the 1916 Revenue Act. The 1916 Act raised the lowest tax rate from 1 percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on estates and excess business profits.
Driven by the war and largely funded by the new income tax, by 1917 the Federal budget was almost equal to the total budget for all the years between 1791 and 1916. Needing still more tax revenue, the War Revenue Act of 1917 lowered exemptions and greatly increased tax rates. In 1916, a taxpayer needed $1.5 million in taxable income to face a 15 percent rate. By 1917 a taxpayer with only $40,000 faced a 16 percent rate and the individual with $1.5 million faced a tax rate of 67 percent.
Another revenue act was passed in 1918, which hiked tax rates once again, this time raising the bottom rate to 6 percent and the top rate to 77 percent. These changes increased revenue from $761 million in 1916 to $3.6 billion in 1918, which represented about 25 percent of Gross Domestic Product (GDP). Even in 1918, however, only 5 percent of the population paid income taxes and yet the income tax funded one-third of the cost of the war.
The economy boomed during the 1920s and increasing revenues from the income tax followed. This allowed Congress to cut taxes five times, ultimately returning the bottom tax rate to 1 percent and the top rate down to 25 percent and reducing the Federal tax burden as a share of GDP to 13 percent. As tax rates and tax collections declined, the economy was strengthened further.
In October of 1929 the stock market crash marked the beginning of the Great Depression. As the economy shrank, government receipts also fell. In 1932, the Federal government collected only $1.9 billion, compared to $6.6 billion in 1920. In the face of rising budget deficits which reached $2.7 billion in 1931, Congress followed the prevailing economic wisdom at the time and passed the Tax Act of 1932 which dramatically increased tax rates once again. This was followed by another tax increase in 1936 that further improved the government's finances while further weakening the economy. By 1936 the lowest tax rate had reached 4 percent and the top rate was up to 79 percent. In 1939, Congress systematically codified the tax laws so that all subsequent tax legislation until 1954 amended this basic code. The combination of a shrunken economy and the repeated tax increases raised the Federal government's tax burden to 6.8 percent of GDP by 1940.
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THE SOCIAL SECURITY TAX
The state of the economy during the Great Depression led to passage of the Social Security Act in 1935. This law provided payments known as "unemployment compensation" to workers who lost their jobs. Other sections of the Act gave public aid to the aged, the needy, the handicapped, and to certain minors. These programs were financed by a 2 percent tax, one half of which was subtracted directly from an employee's paycheck and one half collected from employers on the employee's behalf. The tax was levied on the first $3,000 of the employee's salary or wage.
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WORLD WAR II
Even before the United States entered the Second World War, increasing defense spending and the need for monies to support the opponents of Axis aggression led to the passage in 1940 of two tax laws that increased individual and corporate taxes, which were followed by another tax hike in 1941. By the end of the war the nature of the income tax had been fundamentally altered. Reductions in exemption levels meant that taxpayers with taxable incomes of only $500 faced a bottom tax rate of 23 percent, while taxpayers with incomes over $1 million faced a top rate of 94 percent. These tax changes increased federal receipts from $8.7 billion in 1941 to $45.2 billion in 1945. Even with an economy stimulated by war-time production, federal taxes as a share of GDP grew from 7.6 percent in 1941 to 20.4 percent in 1945. Beyond the rates and revenues, however, another aspect about the income tax that changed was the increase in the number of income taxpayers from 4 million in 1939 to 43 million in 1945.
Another important feature of the income tax that changed was the return to income tax withholding as had been done during the Civil War. This greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
The federal, state, and local tax systems in the United States have been marked by significant changes over the years in response to changing circumstances and changes in the role of government. The types of taxes collected, their relative proportions, and the magnitudes of the revenues collected are all far different than they were 50 or 100 years ago. Some of these changes are traceable to specific historical events, such as a war or the passage of the 16th Amendment to the Constitution that granted the Congress the power to levy a tax on personal income. Other changes were more gradual, responding to changes in society, in our economy, and in the roles and responsibilities that government has taken unto itself
COLONIAL TIMES
For most of our nation's history, individual taxpayers rarely had any significant contact with Federal tax authorities as most of the Federal government's tax revenues were derived from excise taxes, tariffs, and customs duties. Before the Revolutionary War, the colonial government had only a limited need for revenue, while each of the colonies had greater responsibilities and thus greater revenue needs, which they met with different types of taxes. For example, the southern colonies primarily taxed imports and exports, the middle colonies at times imposed a property tax and a "head" or poll tax levied on each adult male, and the New England colonies raised revenue primarily through general real estate taxes, excises taxes, and taxes based on occupation.
England's need for revenues to pay for its wars against France led it to impose a series of taxes on the American colonies. In 1765, the English Parliament passed the Stamp Act, which was the first tax imposed directly on the American colonies, and then Parliament imposed a tax on tea. Even though colonists were forced to pay these taxes, they lacked representation in the English Parliament. This led to the rallying cry of the American Revolution that "taxation without representation is tyranny" and established a persistent wariness regarding taxation as part of the American culture.
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THE POST REVOLUTIONARY ERA
The Articles of Confederation, adopted in 1781, reflected the American fear of a strong central government and so retained much of the political power in the States. The national government had few responsibilities and no nationwide tax system, relying on donations from the States for its revenue. Under the Articles, each State was a sovereign entity and could levy tax as it pleased.
When the Constitution was adopted in 1789, the Founding Fathers recognized that no government could function if it relied entirely on other governments for its resources, thus the Federal Government was granted the authority to raise taxes. The Constitution endowed the Congress with the power to "…lay and collect taxes, duties, imposts, and excises, pay the Debts and provide for the common Defense and general Welfare of the United States." Ever on guard against the power of the central government to eclipse that of the states, the collection of the taxes was left as the responsibility of the State governments.
To pay the debts of the Revolutionary War, Congress levied excise taxes on distilled spirits, tobacco and snuff, refined sugar, carriages, property sold at auctions, and various legal documents. Even in the early days of the Republic, however, social purposes influenced what was taxed. For example, Pennsylvania imposed an excise tax on liquor sales partly "to restrain persons in low circumstances from an immoderate use thereof." Additional support for such a targeted tax came from property owners, who hoped thereby to keep their property tax rates low, providing an early example of the political tensions often underlying tax policy decisions.
Though social policies sometimes governed the course of tax policy even in the early days of the Republic, the nature of these policies did not extend either to the collection of taxes so as to equalize incomes and wealth, or for the purpose of redistributing income or wealth. As Thomas Jefferson once wrote regarding the "general Welfare" clause:
To take from one, because it is thought his own industry and that of his father has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, "to guarantee to everyone a free exercise of his industry and the fruits acquired by it."
With the establishment of the new nation, the citizens of the various colonies now had proper democratic representation, yet many Americans still opposed and resisted taxes they deemed unfair or improper. In 1794, a group of farmers in southwestern Pennsylvania physically opposed the tax on whiskey, forcing President Washington to send Federal troops to suppress the Whiskey Rebellion, establishing the important precedent that the Federal government was determined to enforce its revenue laws. The Whiskey Rebellion also confirmed, however, that the resistance to unfair or high taxes that led to the Declaration of Independence did not evaporate with the forming of a new, representative government.
During the confrontation with France in the late 1790's, the Federal Government imposed the first direct taxes on the owners of houses, land, slaves, and estates. These taxes are called direct taxes because they are a recurring tax paid directly by the taxpayer to the government based on the value of the item that is the basis for the tax. The issue of direct taxes as opposed to indirect taxes played a crucial role in the evolution of Federal tax policy in the following years. When Thomas Jefferson was elected President in 1802, direct taxes were abolished and for the next 10 years there were no internal revenue taxes other than excises.
To raise money for the War of 1812, Congress imposed additional excise taxes, raised certain customs duties, and raised money by issuing Treasury notes. In 1817 Congress repealed these taxes, and for the next 44 years the Federal Government collected no internal revenue. Instead, the Government received most of its revenue from high customs duties and through the sale of public land.
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THE CIVIL WAR
When the Civil War erupted, the Congress passed the Revenue Act of 1861, which restored earlier excises taxes and imposed a tax on personal incomes. The income tax was levied at 3 percent on all incomes higher than $800 a year. This tax on personal income was a new direction for a Federal tax system based mainly on excise taxes and customs duties. Certain inadequacies of the income tax were quickly acknowledged by Congress and thus none was collected until the following year.
By the spring of 1862 it was clear the war would not end quickly and with the Union's debt growing at the rate of $2 million daily it was equally clear the Federal government would need additional revenues. On July 1, 1862 the Congress passed new excise taxes on such items as playing cards, gunpowder, feathers, telegrams, iron, leather, pianos, yachts, billiard tables, drugs, patent medicines, and whiskey. Many legal documents were also taxed and license fees were collected for almost all professions and trades.
The 1862 law also made important reforms to the Federal income tax that presaged important features of the current tax. For example, a two-tiered rate structure was enacted, with taxable incomes up to $10,000 taxed at a 3 percent rate and higher incomes taxed at 5 percent. A standard deduction of $600 was enacted and a variety of deductions were permitted for such things as rental housing, repairs, losses, and other taxes paid. In addition, to assure timely collection, taxes were "withheld at the source" by employers.
The need for Federal revenue declined sharply after the war and most taxes were repealed. By 1868, the main source of Government revenue derived from liquor and tobacco taxes. The income tax was abolished in 1872. From 1868 to 1913, almost 90 percent of all revenue was collected from the remaining excises.
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THE 16th AMENDMENT
Under the Constitution, Congress could impose direct taxes only if they were levied in proportion to each State's population. Thus, when a flat rate Federal income tax was enacted in 1894, it was quickly challenged and in 1895 the U.S. Supreme Court ruled it unconstitutional because it was a direct tax not apportioned according to the population of each state.
Lacking the revenue from an income tax and with all other forms of internal taxes facing stiff resistance, from 1896 until 1910 the Federal government relied heavily on high tariffs for its revenues. The War Revenue Act of 1899 sought to raise funds for the Spanish-American War through the sale of bonds, taxes on recreational facilities used by workers, and doubled taxes on beer and tobacco. A tax was even imposed on chewing gum. The Act expired in 1902, so that Federal receipts fell from 1.7 percent of Gross Domestic Product to 1.3 percent.
While the War Revenue Act returned to traditional revenue sources following the Supreme Court's 1895 ruling on the income tax, debate on alternative revenue sources remained lively. The nation was becoming increasingly aware that high tariffs and excise taxes were not sound economic policy and often fell disproportionately on the less affluent. Proposals to reinstate the income tax were introduced by Congressmen from agricultural areas whose constituents feared a Federal tax on property, especially on land, as a replacement for the excises.
Eventually, the income tax debate pitted southern and western Members of Congress representing more agricultural and rural areas against the industrial northeast. The debate resulted in an agreement calling for a tax, called an excise tax, to be imposed on business income, and a Constitutional amendment to allow the Federal government to impose tax on individuals' lawful incomes without regard to the population of each State.
By 1913, 36 States had ratified the 16th Amendment to the Constitution. In October, Congress passed a new income tax law with rates beginning at 1 percent and rising to 7 percent for taxpayers with income in excess of $500,000. Less than 1 percent of the population paid income tax at the time. Form 1040 was introduced as the standard tax reporting form and, though changed in many ways over the years, remains in use today.
One of the problems with the new income tax law was how to define "lawful" income. Congress addressed this problem by amending the law in 1916 by deleting the word "lawful" from the definition of income. As a result, all income became subject to tax, even if it was earned by illegal means. Several years later, the Supreme Court declared the Fifth Amendment could not be used by bootleggers and others who earned income through illegal activities to avoid paying taxes. Consequently, many who broke various laws associated with illegal activities and were able to escape justice for these crimes were incarcerated on tax evasion charges.
Prior to the enactment of the income tax, most citizens were able to pursue their private economic affairs without the direct knowledge of the government. Individuals earned their wages, businesses earned their profits, and wealth was accumulated and dispensed with little or no interaction with government entities. The income tax fundamentally changed this relationship, giving the government the right and the need to know about all manner of an individual or business' economic life. Congress recognized the inherent invasiveness of the income tax into the taxpayer's personal affairs and so in 1916 it provided citizens with some degree of protection by requiring that information from tax returns be kept confidential.
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WORLD WAR I AND THE 1920’s
The entry of the United States into World War I greatly increased the need for revenue and Congress responded by passing the 1916 Revenue Act. The 1916 Act raised the lowest tax rate from 1 percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on estates and excess business profits.
Driven by the war and largely funded by the new income tax, by 1917 the Federal budget was almost equal to the total budget for all the years between 1791 and 1916. Needing still more tax revenue, the War Revenue Act of 1917 lowered exemptions and greatly increased tax rates. In 1916, a taxpayer needed $1.5 million in taxable income to face a 15 percent rate. By 1917 a taxpayer with only $40,000 faced a 16 percent rate and the individual with $1.5 million faced a tax rate of 67 percent.
Another revenue act was passed in 1918, which hiked tax rates once again, this time raising the bottom rate to 6 percent and the top rate to 77 percent. These changes increased revenue from $761 million in 1916 to $3.6 billion in 1918, which represented about 25 percent of Gross Domestic Product (GDP). Even in 1918, however, only 5 percent of the population paid income taxes and yet the income tax funded one-third of the cost of the war.
The economy boomed during the 1920s and increasing revenues from the income tax followed. This allowed Congress to cut taxes five times, ultimately returning the bottom tax rate to 1 percent and the top rate down to 25 percent and reducing the Federal tax burden as a share of GDP to 13 percent. As tax rates and tax collections declined, the economy was strengthened further.
In October of 1929 the stock market crash marked the beginning of the Great Depression. As the economy shrank, government receipts also fell. In 1932, the Federal government collected only $1.9 billion, compared to $6.6 billion in 1920. In the face of rising budget deficits which reached $2.7 billion in 1931, Congress followed the prevailing economic wisdom at the time and passed the Tax Act of 1932 which dramatically increased tax rates once again. This was followed by another tax increase in 1936 that further improved the government's finances while further weakening the economy. By 1936 the lowest tax rate had reached 4 percent and the top rate was up to 79 percent. In 1939, Congress systematically codified the tax laws so that all subsequent tax legislation until 1954 amended this basic code. The combination of a shrunken economy and the repeated tax increases raised the Federal government's tax burden to 6.8 percent of GDP by 1940.
Back to Top
THE SOCIAL SECURITY TAX
The state of the economy during the Great Depression led to passage of the Social Security Act in 1935. This law provided payments known as "unemployment compensation" to workers who lost their jobs. Other sections of the Act gave public aid to the aged, the needy, the handicapped, and to certain minors. These programs were financed by a 2 percent tax, one half of which was subtracted directly from an employee's paycheck and one half collected from employers on the employee's behalf. The tax was levied on the first $3,000 of the employee's salary or wage.
Back to Top
WORLD WAR II
Even before the United States entered the Second World War, increasing defense spending and the need for monies to support the opponents of Axis aggression led to the passage in 1940 of two tax laws that increased individual and corporate taxes, which were followed by another tax hike in 1941. By the end of the war the nature of the income tax had been fundamentally altered. Reductions in exemption levels meant that taxpayers with taxable incomes of only $500 faced a bottom tax rate of 23 percent, while taxpayers with incomes over $1 million faced a top rate of 94 percent. These tax changes increased federal receipts from $8.7 billion in 1941 to $45.2 billion in 1945. Even with an economy stimulated by war-time production, federal taxes as a share of GDP grew from 7.6 percent in 1941 to 20.4 percent in 1945. Beyond the rates and revenues, however, another aspect about the income tax that changed was the increase in the number of income taxpayers from 4 million in 1939 to 43 million in 1945.
Another important feature of the income tax that changed was the return to income tax withholding as had been done during the Civil War. This greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.
Colonial Income Tax can help you with a full range of tax services. Our staff members include Certified Public Accountants (CPA) and IRS Certified tax professionals with many years of experience. Our services include income tax preparation for your federal and state income tax returns, small business tax returns, partnerships, LLC'S and trusts.
The initial meeting for new clients is free. Our fees will vary on the complexity of your tax situation. In payment we accept cash, checks, debit card, VISA, MasterCard and money orders. Please call us at, 302-322-1135 to arrange a meeting with one of our tax professionals or e-mail JCW@ColonialIncomeTax.com for more information.
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