Tuesday, April 2, 2019

History of Income Tax and the 1040.

Taxes, Tax Office, Tax Return, FormThe deadline for sending in your income tax is slowly approaching.  It falls on the day after Palm Sunday this year and can cause fear in the hearts of men.   I'm one of those who usually gets and extension because I'm in the boondocks, my tax person is elsewhere in the state, and it takes a while for all the forms to get to me due to the slow mail delivery.  This year, I'll actually get it done on time.

Income taxes have been around for a very long time.  The earliest records of people paying income tax date back about 4500 years ago when people were required to pay taxes in the form of livestock in Mesopotamia.

The United States Government has not always collected income tax.  In fact, up until the Civil War, the country didn't need to collect income tax due to raising enough monies using other sources but in 1861, the government passed its first income tax to pay for the war it found itself involved in.  About one year later, Congress passed the Internal Revenue which created the Bureau of Internal Revenue the predecessor to today's Internal Revenue Service.

In addition to collecting income tax, the bureau also levied excise taxes on everything they could from tobacco to jewelry but in 1872, Congress did not renew the income tax so it disappeared.  Income tax was not popular with the population so Congress passed the Wilson-Groman tariff in 1894 which in essence placed a 2% income tax on any income over $4000 but was overturned by the Supreme Court in 1895.

In 1898, the War Revenue Act of 1898 levied another death tax to fund the Spanish American War.  Soon, people began supporting the reinstatement of the income tax and in February 1913, Congress ratified the sixteenth amendment which gave the government the right to tax personal income.  They implemented a new system which withheld money for taxes at the source as it is today.

In 1914, the Bureau of Internal Revenue released its first form, the "1040" which is still in use today. The first year, the 1040 was used, people filled it out, and sent it in to be checked for its accuracy.  They did not have to pay tax with it but in 1915, people voiced concerns about the difficulty of filling out the form which lead to the Revenue Act of 1916 with the adjusted tax rates and income scales.

Originally, it was 1% for the bottom bracket or income up to about $20,000 to 7% for anyone earning over $500,000 but that was rapidly changed to 2% for the lowest bracket and the highest bracket ended up at 25% for income over 2,000,000.  The Revenue Act of 1916 also imposed the ancestor to what we know as an estate tax.  Over the years, the tax rate increased and the amount of the estate also went up so by 1941 the government taxed estates at 77% for a value of over $50,000,000 but by the 1980's the amount of tax dropped. Congress also set up the corporate excess profit tax which causes corporations to be taxed on profit above a "reasonable amount".

Over the years, the one page instruction document for the income tax return, has grown as the tax code has been amended, changed, and adjusted according to the demands of Congress.  The first income tax return from 1913 and 1914 is three pages long with one page of instructions and is not that complex compared to today's returns. By 1917, the income tax returns is more complex with two pages of instructions.  If you are interested in seeing what the forms looked like through the years, check this site out and enjoy.

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