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What are Tax Codes?

Updated for Tax Year 2016


OVERVIEW

Internal Revenue Code consists of thousands of individual tax laws applied at the federal, state, county and city levels.


The term “tax codes” can refer to a collection of tax laws, such as the Internal Revenue Code (IRC), and can also refer to specific tax laws within the IRC. For example, IRC section 162 is a tax code that defines when you can claim a business deduction. However, the IRC includes thousands of individual tax codes or laws that apply to an array of federal taxation issues.

How tax codes are created

Tax codes don’t just apply to the federal government. Every state, city or county government that imposes some type of taxation will initially authorize it with tax codes. Whether it’s the U.S. Congress or your local city council, tax codes are initially drafted by elected officials and then voted on.

Generally, if a majority of legislators vote to pass the tax code, then it becomes law. Once it becomes law, it is added to the government’s collection of tax laws. For purposes of the federal tax system, once passed, the tax law is assigned a number or code section and then added to the main collection of tax laws in the IRC.

Finding tax codes

When you prepare you federal income tax return, for example, it’s unlikely that you will ever find it necessary to read actual tax codes. In many cases, the tax codes don’t provide enough detail to offer any tax return preparation guidance. However, if you are interested in reading the tax codes, you can find many printed copies in your local library or online. If you need to research your state and local tax codes, the agency responsible for taxation in your jurisdiction usually makes them available on their website.

How tax codes affect your return

Tax codes are the ultimate authority on any tax you are required to pay and provide the basis for everything on your tax return. For example, when you prepare your tax return, the instructions to it generally provide you with all of the information you need.

These instructions are drafted by the IRS to help you understand how to report your income, deductions and credits. Everything you read in the instructions is based on the various tax codes that apply to federal income tax. When you complete your return and use the tax tables to determine how much you owe, the percentages and tax rates the IRS uses are taken from federal tax codes. Since the IRS explains the tax law in these publications in plain-English, it’s unnecessary for you to get any deeper into the tax law.

Of course, when you use TurboTax to prepare your taxes, you don’t need to know anything about tax codes. Our tax experts have already accounted for all of the latest tax codes and built them into the software. All you need to do is answer simple questions about your income, expenses, etc. and TurboTax applies the appropriate tax codes to your return.

Interpreting tax codes

Even though tax codes are the ultimate authority, there are many other documents that interpret them, which also have significant legal authority. For example, the U.S. Treasury issues regulations on most tax code sections that provide longer explanations and examples on how the law is used. The IRS also drafts its own materials that you must adhere to even though they are not actual tax codes.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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