Taxes

What are Income Taxes—History, Details, and Netflix

February 4, 2021

What are income taxes, anyway? Let us explain what you might have seen on Netflix shows, and then we will fill in the blanks.

What are Income Taxes Cover Image 1

Since the pandemic limited our comings and goings, many of us turned to Netflix to pass the extra time we had at home.  My extra time became the hours after I put my kids to bed, when I previously had been too tired to watch TV.  Working from home and without the commute in the mornings, I no longer had to wake so early, and therefore I wasn’t as tired in the evenings. Well, among the shows that hooked me was a historical fiction series about early colonists in the United States.  As unlikely as it may seem, Netflix has turned out to be a great educational resource for many topics, including income taxes.

Now, press pause on that Netflix show that might be distracting you from your duties, because there is no time like the present to discuss income taxes.  Why?  Because we are in the throws of tax season, of course!  So, in case Netflix doesn’t fully satisfy your curiosity about the American income tax, let us explain what income taxes are, and the history of this sometimes controversial levy. 

Historical (Non)Fiction Taxes

As with many historical fiction works—whether literary, tv, or cinema—you’ll inevitably see the theme of taxation woven somewhere within the plot.  That’s because art often imitates life.  In this American life, we often encounter this famous quote from Benjamin Franklin’s letter to Jean-Baptiste Leroy: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

Prior to Franklin’s address, paying taxes wasn’t necessarily a guarantee. Why? Well, because there was no established government up to that point.  It wasn’t for lack of trying on the British’s part, however.  British leaders made every effort to impose taxes on settlers.  However, while it may seem the colonists were trying to avoid paying taxes, that couldn’t be further from the truth.  In reality, the colonists simply wanted to pay their fair portion of taxes.  Still, despite the American colonists’ successful resistance against the oppressive forces they had fled, it quickly became clear that the taxes imposed on them were a necessary evil in the end.  After all, how would the newly established American government—a non-revenue producing entity—be able to sustain itself without some source of income? 

Types of Income Taxes

Over time, the new American government attempted a variety of types of taxes.  Some taxes stood the test of time, while others fell by the wayside.  Still, certain taxes disappeared, only to make a comeback in later years. 

Related:  IRS Releases 2017 W-4

There are currently many different types of taxes imposed by the U.S. government.  Taxes are broken into different categories, such as earning taxes and buying taxes.  Earning taxes include the following:

  • individual income taxes – individuals pay this based on how much they earn
  • corporate income taxes – companies pay this based on their operating earnings
  • payroll taxes – employers pay this based on their employees’ wages and earnings
  • capital gains taxes – individuals and corporations pay this when they sell investments that have grown in value

We are going to focus on income taxes.

Individual and Corporate Income Taxes

Now, the first thing we need to do is identify the different types of income taxes. We’ll start with biggie for individuals, then the corporate tax, and finally state income tax.

Federal Income Tax

Also referred to as FIT, this income tax originally debuted during the Civil War.  American workers pay this tax.  However, it was not until 1913 that FIT was officially enacted.  The tax provides funding for national services for defense and veterans, social programs, and paying interest on the national debt, among other things.  The W-2 form reflects an employee’s FIT earned in the prior year.

Corporate Income Tax

Commonly called a corporation or company tax, the CIT is a tax on a company’s profits.  This tax is a little less clear-cut, because certain corporations are not subject to it, if the income is reported as an individual’s income tax.  The IRS Form 1120 reports CIT.

State Income Tax

Also called SIT, this tax is the portion of an individual’s income that is taken by the state.  The funds collected through SIT are used for many services for the state’s citizens.  These services include financial assistance to low-income families, transportation, and public employee health benefits and pensions, among many other services.  SIT is also going to be reported on the W-2, but in box 17.

Income Tax Brackets

When it comes to paying income taxes, one of the criteria used to determine how much you owe is the tax bracket you fall into.  For the 2020 tax year, the tax rates range form 10-37%, and they are applied based on the individual’s taxable income.  Income tax brackets are subject to change each year due to cost of living increases, and other economic fluctuations.

Related:  Reminders of ACA Changes Coming Up in 2016

Income Taxes and PPP

Now, 2020 was an unusual year for many reasons, and there are some noteworthy distinctions where income taxes are concerned, as well.  In a previous post we discussed the ramifications for companies using PPP funds. 

The IRS says:

  • Borrowers may not deduct covered expenses, paid with PPP funds, on income taxes. 
  • The amount of forgiven PPP funds used for covered expenses during the covered period will increase the borrower’s taxable income. 
  • If any portion of the PPP loan was not used to pay for covered expenses, then the remaining expenses may still be deductible.
  • If the PPP loan was not or is not expected to be forgiven, then the expenses will go through the normal process of assessment for deductibility.

Netflix is Where It’s At… To A Point

If you’re like me, you might see a recurring theme about taxes in some historical fiction shows or movies. While Netflix shows might not be the most reliable source for information about income taxes, they may provide us with a little insight about how U.S. taxes came about.  For example, we found out that our Federal Income Tax first emerged during the Civil War, and that in the early 20th century it was made official. 

We also discussed where the funding from FIT goes, and the types of services SIT helps provide.  Furthermore, we know that individuals are taxed based on their income brackets, and corporations pay taxes according to their company profits.  So, perhaps you can feel a little better about your chill sesh in front of the tube.  After all, you might have been learning some accurate information about taxes without even realizing it.

Image of a black television on a white wall with three books stacked on a dresser under it.


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