Tax Law
Federal, state, and local taxation
Overview
Tax law in the United States is primarily governed by the Internal Revenue Code (Title 26), which establishes federal income tax, payroll taxes, estate and gift taxes, and excise taxes. The IRS administers and enforces the tax code, processing over 150 million individual returns annually.
The federal income tax system uses progressive rates, currently ranging from 10% to 37% for individuals. The Tax Cuts and Jobs Act of 2017 significantly reformed the code by reducing corporate rates to 21%, nearly doubling the standard deduction, and limiting state and local tax deductions. Many individual provisions are scheduled to expire after 2025.
Tax-exempt organizations under Section 501(c)(3) play a vital role in the nonprofit sector, receiving tax-deductible contributions while being prohibited from political campaign activity. The IRS enforces compliance through audits, penalties, and criminal prosecution for tax evasion.
Key Federal Laws
- •Internal Revenue Code (26 U.S.C.)
- •Tax Cuts and Jobs Act of 2017
- •Employee Retirement Income Security Act (ERISA)
- •Inflation Reduction Act of 2022 (energy tax credits)
- •Foreign Account Tax Compliance Act (FATCA)
Key Cases
- •NFIB v. Sebelius (2012) — ACA individual mandate as a tax
- •South Dakota v. Wayfair (2018) — Online sales tax
- •Cheek v. United States (1991) — Willfulness in tax evasion
- •Commissioner v. Glenshaw Glass Co. (1955) — Definition of income
- •Bob Jones University v. United States (1983) — Tax exemption and public policy
State Variations
States impose their own income taxes with rates ranging from 0% (in seven states with no income tax) to over 13% (California). Property taxes are exclusively state and local, varying enormously by jurisdiction. Sales tax rates and bases differ widely, with some states exempting food and medicine. Several states have enacted their own versions of the earned income tax credit or child tax credit.
Frequently Asked Questions
What is the difference between a tax deduction and a tax credit?
A tax deduction reduces your taxable income, so its value depends on your tax bracket. A $1,000 deduction saves $220 for someone in the 22% bracket. A tax credit directly reduces your tax bill dollar-for-dollar, so a $1,000 credit saves $1,000 regardless of bracket. Refundable credits can result in a refund even if you owe no tax.
How long should I keep tax records?
The IRS generally has three years from the filing date to audit a return, so keep records for at least three years. If you underreport income by more than 25%, the window extends to six years. There is no statute of limitations for fraud or failure to file. Keep records of property purchases, retirement contributions, and capital improvements indefinitely.