What Is Tax Law: Federal and State Tax Obligations Explained

What Is Tax Law?

Tax law is the body of legal rules governing the assessment, collection, and enforcement of taxes imposed by government authorities. It encompasses statutes enacted by legislative bodies, regulations issued by executive agencies, court decisions interpreting those statutes, and the constitutional principles that define the scope of taxing authority. In the United States, tax law operates at the federal, state, and local levels, with each layer imposing distinct obligations on individuals, businesses, and other entities.

The primary source of federal tax law is the Internal Revenue Code (IRC), codified as Title 26 of the United States Code. The Internal Revenue Service (IRS), a bureau of the U.S. Department of the Treasury, administers and enforces federal tax law. State tax laws are administered by state revenue departments and vary significantly in their scope and rates.

Constitutional Foundation of U.S. Tax Law

The constitutional authority to impose taxes in the United States derives primarily from Article I, Section 8, which grants Congress the power to "lay and collect taxes," and the Sixteenth Amendment (ratified in 1913), which established Congress's authority to impose an income tax without apportioning it among the states based on population. Before the Sixteenth Amendment, a federal income tax was constitutionally problematic, as demonstrated when the Supreme Court struck down the Income Tax Act of 1894 in Pollock v. Farmers' Loan & Trust Co. (1895).

States derive taxing authority from their own constitutions, subject to federal constitutional limitations including the Commerce Clause and the Equal Protection Clause.

Major Categories of Federal Taxes

Tax Type	Who Pays	Administering Agency	FY2023 Revenue
Individual Income Tax	Individuals on earned and unearned income	IRS	~$2.18 trillion
Payroll Taxes (FICA)	Employees and employers	IRS / SSA	~$1.61 trillion
Corporate Income Tax	Corporations on taxable profits	IRS	~$575 billion
Excise Taxes	Consumers/producers of specific goods	IRS / TTB / CBP	~$94 billion
Estate and Gift Tax	Estates above exemption; gift givers	IRS	~$35 billion

Federal Individual Income Tax

The federal income tax applies to taxable income—gross income minus allowable deductions. The U.S. uses a graduated (progressive) rate structure, meaning different portions of income are taxed at increasing rates as income rises. For 2024, the seven federal income tax brackets range from 10% on the lowest taxable income to 37% on income above $609,350 for single filers.

Taxable income is calculated by subtracting either the standard deduction ($14,600 for single filers in 2024; $29,200 for married filing jointly) or itemized deductions from adjusted gross income (AGI). Common itemized deductions include mortgage interest, state and local taxes (capped at $10,000 by the Tax Cuts and Jobs Act), charitable contributions, and certain medical expenses.

Payroll Taxes and FICA

The Federal Insurance Contributions Act (FICA) requires employees and employers each to pay 6.2% of wages for Social Security (up to the Social Security wage base of $168,600 in 2024) and 1.45% for Medicare, with no wage base cap. Self-employed individuals pay both the employee and employer portions—15.3% total—as self-employment tax, but may deduct half as a business expense.

State and Local Tax Obligations

State tax regimes vary widely. As of 2024:

Nine states impose no income tax on wages: Alaska, Florida, Nevada, New Hampshire (interest/dividends only), South Dakota, Tennessee, Texas, Washington, and Wyoming.
State income tax rates: Range from 2.5% (Arizona) to 13.3% (California's top marginal rate).
Sales taxes: 45 states and the District of Columbia impose sales taxes, with combined state and local rates ranging from 0% (Oregon, Montana, New Hampshire, Delaware, Alaska on state level) to over 10% in some localities.
Property taxes: Imposed primarily at the local (county or municipal) level, property taxes are the primary funding mechanism for public schools and local government in most states.

Tax Filing Requirements

Individual returns: Federal income tax returns (Form 1040) are generally due April 15 of the year following the tax year. A six-month extension (to October 15) is available by filing Form 4868, but this extends the filing deadline, not the payment deadline.
Estimated taxes: Self-employed individuals and others with income not subject to withholding must make quarterly estimated tax payments due April 15, June 15, September 15, and January 15 of the following year.
Corporate returns: C-corporation federal tax returns (Form 1120) are due the 15th day of the fourth month after the fiscal year ends (April 15 for calendar-year corporations).

IRS Audit Process

The IRS selects returns for examination through various methods, including computer scoring (DIF scores), random selection, specific issue campaigns, and third-party information document matching. The three primary types of audits are:

Correspondence audit: Conducted entirely by mail, requesting documentation for specific items. The most common and least invasive type.
Office audit: Taxpayer appears at an IRS office to discuss specific issues in person.
Field audit: An IRS agent visits the taxpayer's home or place of business to conduct a comprehensive examination of books, records, and tax positions.

Taxpayer Rights

The IRS Taxpayer Bill of Rights (TBOR), codified in the IRC, establishes ten fundamental rights:

The right to be informed
The right to quality service
The right to pay no more than the correct amount of tax
The right to challenge the IRS's position and be heard
The right to appeal an IRS decision in an independent forum
The right to finality
The right to privacy
The right to confidentiality
The right to retain representation
The right to a fair and just tax system

Tax Disputes and Appeals

Forum	Jurisdiction	Prepayment Required?	Notes
U.S. Tax Court	Federal	No	Most common for individual disputes
U.S. District Court	Federal	Yes (then sue for refund)	Jury trial available
U.S. Court of Federal Claims	Federal	Yes (then sue for refund)	No jury; Washington D.C.
State Tax Courts/Tribunals	State	Varies by state	For state tax disputes

Tax law is one of the most complex and frequently changing areas of U.S. law. Major legislation such as the Tax Reform Act of 1986, the Economic Growth and Tax Relief Reconciliation Act of 2001, the Tax Cuts and Jobs Act of 2017, and the Inflation Reduction Act of 2022 have each substantially restructured the tax landscape. Taxpayers with complex situations—business income, investments, real estate, international activities—generally benefit from working with qualified tax professionals.

This article is for informational purposes only and does not constitute legal advice. Consult a qualified attorney before taking any legal action.