As we close out the 2021 tax season, however unwillingly and with gritted teeth, you might be interested to know that Americans did not always pay personal income taxes. The policy of taxing personal income began with the onset of the Civil War, when Congress passed the Revue Act of 1861. This was a new direction for a Federal tax system based mainly on excise taxes and customs duties. However, Congress soon realized there were certain inadequacies with the new income tax policy. No taxes were actually collected until the following year, when a new law was passed on July 1st. This law made important reforms to the 1861 law, many of which we find in various forms today. These include a two-tiered rate structure based on income, a standard deduction ($600), and taxes being “withheld at the source” by employers to ensure timely collection.
By now you must be wondering what, exactly, the income tax rates were in 1862. Brace yourself. For those earning less than $10,000, the rate was set at 3 percent; if you earned more than $10,000, it went up to 5 percent. Hardly a draconian rate, but no doubt quite an unpleasant turn of events for citizens unaccustomed to paying taxes on income. That is not to say early American paid no taxes before 1862, but generally these were excise taxes and customs duties. What types of items were taxed? The 1862 law included new taxes on playing cards, gunpowder, feathers, telegrams, iron, leather, pianos, yachts, billiard tables, drugs, patent medicines, and whiskey. (What, is that all?) Many legal documents were also taxed and license fees were collected for almost all professions and trades. So even back then, like today, it was all but impossible to keep the government from picking your pocket.
Learn how we can use a variety of estate planning tools to minimize the amount of income taxes you pay. We can’t get you into the 3 percent range, but chances are we can save you more of your hard-earned money.