On this day in 1913, Delaware, Wyoming, and New Mexico approved the 16th Amendment to the U.S. Constitution, ratifying it into law and establishing a federal income tax. When the amendment went into effect 22 days later, it allowed Congress to impose an income tax on individuals and corporations.
An individual income tax, also known as a personal income tax, is a type of tax levied on an individual’s wages, salaries, and other types of income, including most investment income. An investor’s exact tax rate will vary depending on their tax bracket, the type of investment, and—in the case of capital assets—how long they owned the asset before selling. Additionally, if an investor has investment income and their modified adjusted gross income (MAGI) is greater than $200,000 for a single filer, $250,000 if married filing jointly, or $125,000 if married filing separately, then they may additionally owe a 3.8% net investment income (NII) tax.
The first U.S. income tax was introduced in 1861 to finance government spending during the Civil War. However, amid public opposition to the income tax, Congress reduced the tax rate in 1867 before repealing it entirely in 1872. The Wilson Tariff Act of 1894 briefly revived the income tax before it was ruled unconstitutional by the Supreme Court a year later. Less than two decades later, the passage of the 16th Amendment re-established the income tax, which remains to this day.
-Ward