Most Americans are probably not aware that the modern personal income tax had a humble beginning nearly 100 years ago. Woodrow Wilson signed the innocuous sounding Underwood Simmons Tariff Act into law in 1913, which re-imposed a personal income tax in the United States. This was only possible after the U.S. Constitution was amended through the passage of the 16th amendment. Here are some other little known facts about the tax in those early days.
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Fact One: Taxes Were Simple
The first 1040 form produced by the Bureau of Revenue, as it was called then, totaled only four pages, with three pages to be filled out by the taxpayer, and one page of instructions. The tax system was so simple, there must not have been much work for accountants and lawyers back then.
Fact Two: The Tax Base Was Small
The first $3,000 of income for an individual taxpayer, or $4,000 for a married couple was exempt from tax. In 1913, the tax only applied from income between March 1 and the end of the year, so these exemptions were adjusted to $ 2,500 and $3,333 for that year. This meant that most Americans didn't have to pay any tax. If you adjust $3,000 in 1913 for inflation, it is equivalent to $66,000 in today's dollars.
Fact Three: The Tax Rate Was Low
The tax rate for those who had to pay was minuscule - 1% of taxable income, less the exemptions above and the deductions that were allowed at the time. High-income earners paid more, however, as a 1% surcharge was levied on taxable income between $20,000 and $50,000. The surcharge went as high as 6% for taxable income above $500,000. A taxable income of $500,000 in 1913 is equal to approximately $11 million in today's dollars. (For more, see A Concise History Of Changes In U.S. Tax Law.)
Fact Four: Tax Penalties Were Relatively Lenient
The penalty for filing a false or fraudulent return was only a misdemeanor and resulted in jail time of one year or less. The monetary penalty was substantial, however, and included a fine of up to $2,000, and a penalty tax of 100% of the tax due. The penalty for simply failing to file a return on time ranged from $20 to $1000.
Fact Five: The Write-Offs Were Basic
The government only allowed six categories of general deductions in 1913. These included business expenses, interest paid and state and local taxes paid by the taxpayer. Taxpayers could also deduct non-reimbursed casualty losses sustained due to fire or storms, worthless debt written off and an allowance for the wear and tear of property used in business. (To learn more, check out the 10 Most Overlooked Tax Deductions.)
Fact Six: There Were No Medical Or Charitable Deductions
The tax law in 1913 specifically prohibits the deduction of any expense for "medical attendance," unlike today's code, which allows the deduction of medical expenses when it exceeds 7.5% of a taxpayer's income. There was also no deduction allowed for charitable donations or interest on mortgages - although a deduction was allowed for interest paid on all personal indebtedness.
Dividends paid to taxpayers from stocks held were deducted from the income subject to tax. Also, pensions paid by the United States were included as taxable income. Lastly, the return was due on March 1, rather than April 15 as it is today.
The personal income tax system started out as a minor inconvenience to Americans, most of whom owed nothing. Yet, it was from this modest beginning that the income tax and the agency that enforces it became a large part of our everyday life. (For more, see The History Of Taxes In The U.S.)
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