History of US Tax on Individuals

If you are a US citizen, a permanent resident earning income, or a non-resident earning US-sourced income, there is typically some kind of US tax that is assessed. It can be the biggest expense of your lifetime. Since it can play such a critical role on decisions that you make, it is important to understand the history of US tax on individuals and its operation.

Important Dates in History:

1862: The first progressive income tax was passed by Congress in order to help fund the Civil War. This was later repealed in 1872. The highest tax rate at that time was only 5%.

1909: Congress passes the 16th Amendment to the Constitution, granting authority to impose an income tax. This was ratified in 1913 with the highest tax rate being only 7% at that time.

1935: The Social Security Act was passed which introduced the Social Security tax to fund Social Security, unemployment insurance, and health and welfare programs.  

1942: The Revenue Act of 1942 was passed by President Roosevelt which increased taxes and the number of Americans subject to the income tax. 

1943: The Current Tax Payment Act was passed which required employers to withhold taxes from employees and remit them quarterly. 

1944: The highest tax rate of 94% was taxed on those earning more than $200,000 at that time!

1986: Tax Reform Act was passed by President Reagan. It was one of the largest overhauls to tax legislation with 300 provisions and took three years to implement. It lowered the top ordinary tax rate from 50% down to 28%. In 1993, the Omnibus Budget Reconciliation Act was passed which increased the top rate to 39.6%

2001: Economic Growth and Tax Relief Reconciliation Act was passed which provided tax cuts by lowering rates and increasing credits. 

2017: Tax Cuts and Jobs Act was passed which created huge changes in the tax law and lowered rates for many. There are many provisions from the Tax Cut and Jobs Act that are currently set to expire at the end of 2025.

The US Income Tax System:

The U.S. uses a progressive tax system for income taxes. This means that as you earn more, you pay a higher tax on each additional dollar earned. For example, if you are a single individual in 2025 with $100,000 of ordinary taxable income, your tax would be calculated as follows: 

• 10% on the first $11,925 = $1,193

• 12% on the next $36,550 of income = $4,386

• 22% on the next $51,525 of income = $11,336

• Total tax on $100,000 of taxable income as a single filer: $16,915 

This person would fall into the 22% tax bracket but they do not pay 22% on their entire $100,000 of taxable income. This is very important concept to understand since your marginal rate is not a flat rate applied to your entire income. Below are the 2025 Federal income tax brackets and rates for single filers, married couples filing jointing, head of household, and married couples filing separately:

Tax Rate	For Single Filers	For Married Individuals Filing Joint Returns	For Heads of Households	For Married Individuals Filing Separately
10%	$0 to $11,925	$0 to $23,850	$0 to $17,000	$0 to $11,925
12%	$11,926 to $48,475	$23,851 to $96,950	$17,001 to $64,850	$11,926 to $48,475
22%	$48,476 to $103,350	$96,951 to $206,700	$64,851 to $103,350	$48,476 to $103,350
24%	$103,351 to $197,300	$206,701 to $394,600	$103,351 to $197,300	$103,351 to $197,300
32%	$197,301 to $250,525	$394,601 to $501,050	$197,301 to $250,500	$197,301 to $250,525
35%	$250,526 to $626,350	$501,051 to $751,600	$250,501 to $626,350	$250,526 to $375,800
37%	$626,351 or more	$751,601 or more	$626,351 or more	$375,801 or more

A useful planning tool is to consider your effective tax rate. This is your total taxes divided by your total income. In the example above, your effective tax rate would be 16.915% ($16,915 / $100,000). 

The US tax system also imposes several other taxes as well as provides preferential treatment on certain types of income. The most noteworthy additional taxes and rates are as follows:

Capital Gains Tax Rates: Selling a capital asset can result in a lower tax rate if the asset was held for more than year. If the asset was held for a year or less, it is considered a short-term capital gain and the gain is taxed at the higher ordinary rates (see table above). Capital assets would include investments in securities, bonds, mutual funds, partnerships, collections, and even personal assets such as your primary home. Only gains are taxable on personal use assets and there is also a home exclusion available on the sale of your primary home if certain requirements are met. Qualified dividends are also included in the preferential lower tax rates. The 2025 long-term capital gain rates based on your 2025 taxable income are included below.

Filing Status	0% Rate	15% Rate	20% Rate
Single	$0 to $48,350	$48,351 to $533,400	$533,401 or more
Married Filing Jointly	$0 to $96,700	$96,701 to $600,050	$600,051 or more
Married Filing Separately	$0 to $48,350	$48,351 to $300,000	$300,001 or more
Head of Household	$0 to $64,750	$64,751 to $566,700	$566,701 or more

Alternative Minimum Tax: The Alternative Minimum Tax (AMT) is designed to ensure that high-income taxpayers pay a minimum amount of federal income tax. It is calculated on Form 6251 and it starts with your regular taxable income and adds back certain regular tax deductions and nontaxable income. At the end of the calculation, you compare your AMT to your regular tax and the higher amount is your final tax. With the passage of the Tax Cut and Jobs Act in 2017, those individuals impacted by AMT dramatically decreased due to the higher exemption and phase-out thresholds. There are still a few triggers for AMT exposure which include interest from private activity bonds, employees exercising incentive stock options (ISOs), or significant amounts of itemized deductions. The provisions regarding AMT are set to sunset at the end of 2025. Provided that nothing changes during the year, individuals exposed to AMT is set to increase in 2026. 

Payroll Taxes: Includes Social Security and Medicare taxes. Both the employer and the employee pay these taxes. Social Security tax is 6.2% and the Medicare tax is 1.45% for both parties. You only pay Social Security tax on the first $176,100 of your wages in 2025. There is no limit for the Medicare tax and in fact, there an additional Medicare tax of .9% if you earn over $200,000. If you are an employee, your employer withholds this from your paycheck and remits to the IRS. If you are self-employed you are required to pay both the employer portion and the employee portion. If you are a partner in a partnership, it is important to understand if your income will be subject to self-employment tax. In general, if the partnership has income from a trade or business, the general partner will owe self-employment tax on that income as well as any partners receiving guaranteed payments. 

Net Investment Income Tax: This is a 3.8% additional tax on your investment income if your modified adjusted gross income is more than $250,000 if married filing jointly ($200,000 if single) for the tax year 2025. This just taxes your investment income such as interest, dividends, capital gains, rental and royalty income, and income from passive investment activities (income from K1s) so any earned income is excluded.