Tax Deductible Losses

Tax Deductible Losses Congress has provided taxpayers with the ability to reduce their taxable income by claiming tax-deductible losses for the past several decades. The variety of losses that could be claimed has changed over time in response to wars, economic conditions, political pressures, and legislative changes. This paper will examine the allowable loss deductions, the impact on taxpayers, and the effects of the changes to the tax law. The issue of tax deductible losses is closely associated with the government's ability to tax income or revenue. Though this may seem an arbitrary issue to modern day Americans, Congress' ability to tax income is a development of the last one hundred years. Prior to the ratification of the sixteenth Amendment in 1913, the income tax was a contentious issue as it was deemed unconstitutional. Prior to 1913, the government relied heavily on property taxes and excise taxes to raise revenue for its operations. However, there were attempts to establish an income tax prior to the ratification of the amendment. The Revenue Act of 1862 created the first progressive income tax in the United States. The Act was passed in response to the government's need to fund the Civil War. The income tax was simple and provided two tax brackets, the highest being a 5% tax on taxpayers with incomes in excess of $10,000, per annum (Taxhistory.org, n.d.). The argument against the income tax was based on the tax being categorized as a direct tax, which Article I of the Constitution does not allow Congress to impose. Rather, the Congress was limited in its powers of taxation of property and to tax the populace by population distribution. The Revenue Act of 1862, later amended in 1864, received resistance from citizens; though, the majority of citizens were exempt from the tax as the minimum annual