The Purpose of Federal Income Tax

I am a tax professional serving clients in New Richmond, Wisconsin and surrounding cities and townships in Polk and Saint Croix Counties; as well as the Twin Cities/Metro area (Minnesota). I prepare tax returns and represent taxpayers for tax issues big and small before the IRS and state taxing authorities.

As I reflect on this past filing season, I am amazed by the vast array of tax liability I have seen and the inequitable response of individuals to those liabilities. I have had outraged clients who owed $500 and ecstatic clients with a balance due of (only) $9,000. Truly, the 'unfairness' of it all is disheartening. So, as I sat down to author my first blog, I felt compelled to define, for myself, the purpose of paying taxes.

The History of Income Tax:

The United States’ first federal income tax was levied during the Civil War. It became clear to Congress that this would not be a quick war, and the government needed to generate more revenue. It was also during this period, in 1862, that a Commissioner of Internal Revenue was established.

Key dates in income tax history:

  • 1862: The U.S. government initiates a progressive federal income tax to offset Civil War expenses. It levies a 3 percent tax on incomes between $600 and $10,000 and 5 percent on incomes over $10,000.

  • 1872: The tax is repealed.

  • 1894: Federal income tax makes a short-lived comeback, but is ruled unconstitutional the very next year.

  • 1913: The federal income tax resurfaces with the 16th Amendment to the Constitution, giving Congress legal authority to tax income.

  • 1943: The Current Tax Payment Act is signed into law. It is designed to make income tax collection easier. The act requires employers to withhold federal income tax from an employee’s paycheck each pay period and send the payment directly to the IRS on behalf of the employee—a practice that remains today.

  • 1953: The former federal Bureau of Internal Revenue is renamed the Internal Revenue Service we still know today.

  • 1975: The Tax Reduction Act of 1975 creates the earned income tax credit. It reduces the tax burden on low- to moderate-income workers, particularly those with children.

Income tax makes up a large chunk of federal tax revenue. Congress and the president determine how tax revenue is spent and spending priorities vary based on who is in power. Tax revenue allows the government to operate and provide goods and services for citizens. These goods and services include roads, bridges, national parks, education, research and national defense.

Federal individual income tax must be paid to the U.S. government on all forms of annual earnings that make up someone’s taxable income.

It begins with gross income, which is everything you earn for the tax year; this includes wages, tips, bonuses, interest income, rental income, capital gains and more. And there are Internal Revenue Service guidelines for who must file.

Then you figure adjusted gross income (AGI) by making certain adjustments, or deductions. These include, but are not limited to health care savings account deductions, student loan interest, contributions to certain retirement accounts, and other qualifying deductions.

Additional deductions and credits can further reduce tax liability:

Most U.S. citizens need to file a tax return if they make more than a certain amount for the year. You may want to file even if you make less than that amount, because you may get money back if you file. This could apply to you if you have had federal income tax withheld from your pay, made estimated tax payments and/or qualify to claim tax credits such as the Earned Income Tax Credit and Child Tax Credit.

Taxpayers who don’t meet their tax obligations may be subject to penalty.

The IRS can charge a penalty if you do not file your tax return or fail to pay any tax you owe on time. In addition, the IRS can charge interest for underpayment, unpaid balances and charge interest on penalties.

In conclusion, paying income tax is a bugger, despised - but necessary. Tax evasion is illegal and punishable by law. Tax problems can cause you to lose sleep and much, much more; but, choosing a qualified tax professional to prepare your returns and/or represent you before the IRS and state taxing authorities is necessary to ensure you minimize your tax liability, the consequences of non-compliance and are afforded the privileges protected by the Taxpayer Bill of Rights. In my next blog I will discuss the IRS Collection Process, how it works and how I can help you.

Nikki M Andrews, EA

Nikki Andrews Professional Services

1237 N Knowles Avenue

New Richmond, WI 54017

Phone: (715)246-7774



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