How the U.S. tax code works (2024)

Tax codes are the laws and regulations that guide taxation and taxpayer responsibilities

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The U.S. tax code is an important part of how our government works. Understanding it can help you learn how to correctly prepare your taxes, how to save more of your money and where to find help with your tax-related issues.


Key insights

The U.S. tax code is an integral part of the U.S. legal system that guides taxation and taxpayer responsibilities.

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Various tax incentives exist to help create more businesses and protect certain groups of individuals.

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The U.S. tax code applies to all U.S. citizens, as well as noncitizens who live and work in the country.

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What is the U.S. tax code?

The U.S. tax code, also known as the Internal Revenue Code (IRC), is a collection of all the laws and regulations in the United States that govern how individuals and corporations are federally taxed. Each state also has its own tax laws, which work in tandem with the U.S. tax code to govern taxation for the residents of that state.

While navigating the tax code can seem complex, tax software and professionals make it easier for individuals and businesses to comply with tax regulations and maximize their tax efficiency.

How the tax code works

The U.S. tax code is a collection of laws that outline citizens’ and corporations’ financial responsibility to the government.

The progressive tax system

Your individual tax responsibility depends on your ability to contribute. “At its core, [the tax code] operates on a progressive tax system, meaning that the rate of taxation increases as income rises,” explained Dennis Shirshikov, professor of economics and accounting at the City University of New York.

“This system is designed to balance the tax burden primarily across different income groups,” said Shirshikov, “ensuring that those with higher earnings contribute a more significant share of their income.”

This system is designed to balance the tax burden primarily across different income groups, ”
— Dennis Shirshikov, economics professor at City University of New York

Where tax laws originate

The laws in the tax code work together to bring in revenue for the United States government and its various branches, projects and programs. But where do they come from?

Each tax law starts out as a bill in Congress. This bill will usually contain a general tax rule and provisions for many different specific circumstances. While the general rule might be simple, there can be exceptions for many different categories of taxpayers, such as retirees, high-income earners or people with certain disabilities.

Tax code incentives

The U.S. tax code is designed to incentivize certain behaviors that the government considers essential to the good of the country. For example, the U.S. tax code allows more tax credits for business owners than for employees. This recognizes the benefits of more businesses and encourages entrepreneurship.

Another example is tax deductions for retirement savings. Money contributed to certain retirement accounts is tax deductible for most Americans, and older citizens closer to retirement can get an even larger deduction for the same retirement contributions. This isn’t accidental — it encourages people to save for retirement, and the government has structured the tax code accordingly.

What the tax code covers

The tax code is section 26 in the overarching U.S. Code, which is the sum total of all the laws in the United States. Within this section, it is divided into 11 subsections, or subtitles, with each dealing with an area of tax law. These cover everything from income taxes to excise taxes, employment taxes, estate and trust fund taxes, presidential election campaign funding and IRS internal management procedures.

Many Americans are most familiar with the income tax section, which is further divided into sections for standard or “normal” tax returns, self-employed persons, taxation of foreign individuals and corporations and Medicare.

Thankfully, most occasions that would involve diving into the complexities of tax law are quite rare. It’s unlikely that the average citizen will need to deviate from standard tax forms and procedures, but stipulations and instructions do exist for special cases or if you owe substantial back taxes.

The tax code is extremely detailed and complex, and it’s always best to consult a competent accountant or attorney with experience in your specific area if problems should arise.

What the tax code doesn’t cover

The tax code doesn’t cover what the tax revenues are used for (beyond the IRS’s own operations). Taxpayer money that goes toward public programs such as the military, social welfare or other government agencies are covered by other titles in the U.S. Code.

The federal tax code also doesn’t govern taxation by individual states. Most states have their own individual tax codes that regulate the taxation of businesses and individuals in that state.

Finally, the tax code does not include a list of the countries with which the U.S. has tax treaties. This information is published by the U.S. Treasury.

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    FAQ

    Does the U.S. tax code apply to nonresidents?

    The U.S. tax code applies to all U.S. citizens, regardless of where they live or derive their income. However, there are U.S. tax laws and international tax treaties that can help expats and U.S. citizens living abroad avoid double taxation from the U.S. and their country of residence.

    The U.S. tax code also covers citizens of other countries who live and work, and therefore have tax withheld by their employers, in the U.S.

    These situations can get complicated very quickly, so in these special circumstances, it’s best to consult a tax accountant or attorney with experience in international taxation.

    How does the U.S. tax code treat charitable donations?

    The U.S. government encourages Americans to be charitable. Charitable donations can be tax deductible if you choose to itemize your deductions on your tax return. Most taxpayers pay the least in taxes with the standard deduction, so unless you have a great many other itemized deductions during a tax year or are wealthy enough to be very generous, you may not get a direct tax benefit from your charitable donations.

    Can the U.S. tax code affect my retirement savings?

    Yes, the U.S. tax code can affect your retirement savings. For example, the IRS’ “saver’s credit” allows you to claim up to 50% of your retirement savings contributions per year as a tax credit.

    Bottom line

    Having a basic knowledge of the U.S. tax code and its provisions can make you a more confident and knowledgeable taxpayer. The IRS provides taxpayers with a wealth of information through its website that can help you better understand your tax return or be able to explain any issues you might have to a tax professional.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. IRS, “Topic no. 610, Retirement savings contributions credit.” Accessed Feb. 13, 2024.
    2. U.S. House of Representatives Office of the Law Revision Counsel, “United States Code.” Accessed Feb. 13, 2024.
    3. U.S. Department of the Treasury, “Treaties.” Accessed Feb. 13, 2024.
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