The 16th Amendment to the U.S. Constitution gives Congress the power to tax income “from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”1LII / Legal Information Institute. 16th Amendment Ratified on February 3, 1913, it is the constitutional foundation of the federal income tax. Two phrases do the work. “From whatever source derived” lets Congress reach wages, business profits, investment gains, rents, and any other economic gain. “Without apportionment” frees Congress from a rule that had made a workable national income tax nearly impossible.
Why the Amendment Was Needed
Before 1913, Article I, Section 9 of the Constitution required that any “direct” tax be divided among the states in proportion to population.2Library of Congress. Article I Section 9, Constitution Annotated Congress would first decide how much revenue it wanted, then assign each state a share matching its share of the national population. A state with 10% of the population owed 10% of the tax, whether its residents were rich or poor.3Legal Information Institute. Overview of Direct Taxes
Congress tried to tax income anyway. The Income Tax Act of 1894 imposed a flat 2% tax on incomes above $4,000. In Pollock v. Farmers’ Loan & Trust Co. (1895), the Supreme Court struck it down, holding that taxes on income from property, such as rents, interest, and dividends, were direct taxes that had to be apportioned by population.4Justia Law. Pollock v. Farmers Loan and Trust Company, 158 U.S. 601 (1895) Because the 1894 law was not apportioned that way, the whole scheme fell. Pollock made clear that no uniform national income tax could survive under the existing Constitution. The political movement that followed produced the 16th Amendment, which overrode Pollock entirely.
What the Amendment Changed
The amendment gave Congress a standalone power to tax income and to set the rules that go with it: rates, brackets, deductions, credits, and definitions of what counts as income. Congress exercises that power through the Internal Revenue Code, the Treasury issues regulations interpreting it, and the IRS enforces it.5Internal Revenue Service. Tax Code, Regulations and Official Guidance
The Supreme Court confirmed the scope of that power soon after ratification. In Brushaber v. Union Pacific Railroad (1916), the Court held that income taxes authorized by the amendment are treated as indirect taxes and do not need to be apportioned.6Justia Law. Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916) More than a century later, in Moore v. United States (2024), the Court reaffirmed that reading and confirmed that Congress can attribute a business entity’s realized income to its owners for tax purposes.7Supreme Court of the United States. Moore v. United States (2024)
The revenue this power produces funds national defense, infrastructure, Social Security, Medicare, and the general operations of the federal government, without any need for state legislatures to cooperate.
What Counts as Income
Federal law defines gross income in language that echoes the amendment itself: “all income from whatever source derived.” The statute then lists 14 specific categories, including compensation for services, business profits, gains from property sales, interest, rents, royalties, dividends, annuities, pensions, and income from the discharge of debt.8Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined The list is not closed. The statute says income is “not limited to” those items, so virtually any economic gain is taxable unless Congress has specifically excluded it.
Common taxable sources include wages and salaries, interest and dividends, capital gains from selling assets, self-employment profits, rental income, royalties, gambling winnings, prizes, and forgiven debt. Digital assets like cryptocurrency, stablecoins, and NFTs are taxed as property. Selling a digital asset held as an investment triggers capital gains tax, and receiving digital assets as payment for work is taxed as ordinary income.9Internal Revenue Service. Digital Assets
What Congress Has Chosen Not to Tax
The amendment’s reach is broad, but Congress has used its rulemaking power to carve out categories that stay outside gross income. Gifts and inheritances you receive are generally not taxable to you. Qualified scholarship money used for tuition, fees, books, and required supplies is excluded, though amounts covering room and board are not. Life insurance death benefits paid to a beneficiary are typically excluded. Employer contributions to qualifying retirement plans are not counted as current income to the employee, and certain employer-provided benefits like health insurance and qualified transportation are excluded in whole or in part.
These exclusions come from specific provisions of the Internal Revenue Code, not from the amendment. The 16th Amendment lets Congress tax all income; the tax code is where Congress decides what to leave alone.
State Income Taxes Are Separate
The 16th Amendment only concerns federal taxing power. States impose their own income taxes under their own constitutions, and their choices vary widely. Eight states impose no individual income tax at all. Among those that do, some use a single flat rate and others use graduated brackets that resemble the federal structure. Your combined federal and state tax burden depends on where you live.
Penalties for Not Paying
Because the amendment supplies clear constitutional authority, the tax code treats evasion as a serious crime. Willfully attempting to evade federal taxes is a felony carrying up to $100,000 in fines for individuals, $500,000 for corporations, up to five years in federal prison, or both, plus the costs of prosecution.10Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax The IRS can also impose civil penalties for inaccurate returns, late filing, and unpaid balances, and interest accrues on what you owe. If you earn more than $400 in net self-employment income, you are required to file a return whether or not you owe any tax after deductions and credits.11Internal Revenue Service. Check if You Need to File a Tax Return