The history of the imposition of income tax in United States can be traced back to the days of American Civil War, when the Federal government levied tax, as per the U.S. Constitution, Article I, Section 8, Clause 1. Imposition of income tax also took place during the 1890s and after the ratification of the 16th amendment of the American Constitution. In fact, the approval of the 16th Constitutional amendment forms the basis of the income tax pattern existing in United States today. Apart from the provisions laid down by the 16th Constitutional amendment, the recent pattern of income tax also follows several other sections of the 1986 Internal Revenue Code, Subtitle A. They include 26 U.S.C. § 11 which deals with levying income tax on taxable income of companies, and 26 U.S.C. § 1 concerned about levying income tax on the taxable incomes of trusts, individuals and estates.
In United States, the laws pertaining to income tax is highly complex in nature. Yet, its basic idea is comparatively easier to understand, provided a person is well-acquainted with certain concepts associated with income tax. In America, Gross Income is referred to as all incomes generated from all the sources taken together (§ 61) without involving any exclusions (§ 101 et seq.). Exclusion indicates the amount which does not come under the taxable income of a person, like the health insurance paid by the employer or interests incurred from tax-free bonds.
Adjusted Gross Income (AGI) with respect to individuals, refers to the total income less than any above-the-line deductions (§ 62), as laid down in § 62. Alimony (§ 215), movable expenses (§ 217) and business and trade deductions all come under the purview of above-the-line deductions. In fact, the taxable income is taken to be the AGI without applying standard or itemized deductions, whichever is more. It also refers to a deduction for any private exemptions allowed on the part of the taxpayer, his/her spouse (for joint filing) or his/her dependents.
The itemized deductions comprise any deduction not laid down in § 62, like some medical spending (§ 213) or benevolent contributions (§ 170). Subsequently, the taxable income is multiplied with the suitable tax rate, to calculate the due tax amounts. Tax credits like Child Tax Credit (§ 24) or Earned Income Tax Credit (§ 32) leads to lowering of the tax amounts on a dollar-for-dollar basis. This indicates that tax credits are far more costly than the deductions, as deductions are applicable before the tax rates while credits are applicable after the tax rates. However, in case of the non-itemizers, standard deduction procedures are followed.
The table below states the income tax rates and brackets applicable on a single person in United States, under Schedule X: