How almost half of all taxpayers pay nothing in federal income tax
Filed under: Tax
Congressional leaders have been battling over the soon-to-expire Bush tax cuts for more than a year. Yet, there's still no word on whether Congress will vote to extend the cuts, allow the cuts to expire or work out some compromise package that might do a little of both. At the center of the tax cut debate, is one key problem facing the current economy: Tax revenues are decreasing. With less income available to tax thanks to record levels of unemployed workers, there are only two ways to increase tax revenues -- increase the taxpayer base or raise taxes for the existing taxpayer base.
Raising tax rates is unpopular and unlikely to happen in an important election year and expanding the tax base would be just as unwelcome. That's because an astonishing number of taxpayers currently pay no federal income tax at all. Earlier this year, the Tax Policy Center reported that nearly half -- 45% -- of all households paid no federal income tax for the 2009 tax year.
At the time, the headlines made for great commentary, and accusations flew. While it may be politically popular to place the blame squarely on the shoulders of President Obama or former President Bush, depending on your leanings, no one politician is to blame. In fact, the number of non-payers has increased steadily since the mid-1980s. Most dramatically, from 2000 to 2008, during which the number people who did not pay federal income tax climbed a whopping 59% even though the number of filers increased by 10%. During that same time, the nation enjoyed a relatively healthy economy. So what gives?
It would be easy to just look at tax brackets in a vacuum and assume that those in the lower tax brackets are the sole beneficiaries of tax breaks that result in a zero federal income tax bill. While there is a substantial number of low-income individuals who pay no federal income tax, the actual amount of tax paid -- or not paid, as the case may be -- is often less about the amount of income and more about the amount of deductions and credits.
Here are a few tax perks that contribute substantially to the declining numbers of taxpayers in America:
1. Credits and Deductions for Homeowners. Owning a home is the American dream, right? So much so that President Reagan delivered an impassioned speech vowing to protect the rights of homeowners to deduct home mortgage interest on their taxes. The result is a tax system that continues to promote home ownership at the cost of tax revenue. In 2008, the first-time homebuyers credit allowed 1.4 million taxpayers to take credits totaling $1 billion per month. Together with the mortgage interest deduction, housing credits allow taxpayers to "save" an estimated $130 billion each year on taxes.
2. Earned Income Tax Credits. Another popular tax credit is the Earned Income Tax Credit, which is targeted at low- and middle-income taxpayers. The IRS estimates that 24 million filers (about one in six) took advantage of the EITC in 2009, claiming about $50 billion. The EITC "saved" taxpayers $42.9 billion in tax in 2008. Even more controversial, the EITC is available to those filers who may not even owe tax -- and it's refundable, meaning those who file may receive a check from the government even if they didn't pay in a dime of federal income tax.
3. Deferrals and Deductions Using Retirement Plans. A number of retirement plans allow for tax deferral of income. Depending on the types of retirement plans you use and your level of income, it's possible to shield thousands of dollars in income from taxation in any given year. In addition to tax deferred growth, you may be able to claim a deduction or exclusion from income for contributions made to a retirement plan. If you pay the tax now for your retirement plan, as with a Roth IRA, you can make tax-free withdrawals in the future. Restrictions and exceptions apply, but using retirement plans is a popular strategy among taxpayers looking to shave dollars off their tax bills in April.
4. Tax Favored Status for Non-Wage Income. While it's true that the wealthy pay a higher tax rate as income increases, the rate is dependent on the type of income. According to the IRS, less than 20% of the income reported by millionaires is attributable to salary. Most of the income at the top is characterized as capital gains, which is taxed at favorable rates. While the tax rates for ordinary income may climb to 35%, capital gains tax rates are capped at 15% for long-term capital gains. This perk isn't just for the wealthy -- those at the bottom of the tax scale benefit, too, since long-term capital gains are taxed at 0% for those ordinarily in the 10% or 15% tax brackets.
5. Employee Benefits. Under the current tax laws, employers may provide a number of benefits to employees, from transit to certain kinds of stock options to health insurance, completely tax-free. Despite a number of misleading e-mails making the rounds, your health care benefits won't be taxed any differently for the 2010 (or 2011) tax year as they were for 2009. In fact, there are no provisions in the new law to tax health care benefits for individual taxpayers. Health care insurance is just one of a number of benefits for employees that provide substantial perks while legally skirting or deferring taxation.
These are just a few of the popular credits, deductions, and deferrals that allow some taxpayers to increasingly pay less come tax time. Add to the mix deductions and credits for college education, job expenses, and child and dependent care costs, and it's easy to see how taxable income can quickly shrink toward zero. Even as existing laws allow taxpayers to reduce their overall tax bill, Congress continues to add new tax breaks, like the recent Making Work Pay Credit.
We all want to pay less in taxes -- but at what price? If the consensus is that half the country shouldn't shoulder the tax burden for all, something has to give.
Which tax breaks are you willing to give up? Let us know in the comments section.
AP
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Reader Comments (Page 1 of 12)
7-29-2010 @ 2:29PM
itsgottabeodin said...
I'd be happy to give up #5, as my small business has recently doubled the the cost of our health-care plan. Going out on my own individual plan to save money, I find that suddenly my premiums are taxable.
Double-standard much?
Reply
8-02-2010 @ 2:33PM
huazhang2 said...
At the center of the tax cut debate, is one key problem facing the current economy: Tax revenues are decreasing. With less income available to tax thanks to record levels of unemployed workers, there are only two ways to increase tax revenues -- increase the taxpayer base or raise taxes for the existing taxpayer base.btw,I'm a lawyer,30 ,rich but still single.It's hard to get a girlfriend in my town ,most of them like my money more than like me.I just want to find my true love.so i uploaded my hot photos on millionairesocial .c om under the name of hotlove2.u dont have to be a millionaire,but u can meet one there. ..if you girls see this comment,i hope you will check my photos out there.maybe you are the one whom i'm looking for!!!
8-02-2010 @ 2:47PM
Jan said...
I went from working a full-time job, I HATED, to owning my own internet based home business, and making serious money. I kept looking for a way out until a friend of mine told me that he found a way a to make a great living from home . He told me that he found out about it at this website ( http://tiny.cc/HomeBusinessProfitSystem ). That program didn't cost much and it quickly taught me the skills I needed to be successful. I started out part time but in a few months I was able to quit my job. Not only am I making serious money now but I get to spend more time with my family.
8-02-2010 @ 2:59PM
Quick said...
Hauzhang2 -- you a spammer for your "millionaire" come-on site or what?
8-02-2010 @ 3:02PM
The TRUTH said...
The Top 10 Right Wing Lies About Taxes.
* Lie #1: Democrats Plan Across the Board Tax Hikes on January 1st
* Lie #2: Democrats Want a $3.8 Trillion Tax Increase
* Lie #3: Tax Cuts Pay for Themselves
* Lie #4: The Bush Tax Cuts Didn't Add to the Deficit
* Lie #5: Expiring High Income Tax Cuts Will Hurt Small Business
* Lie #6: The Estate Tax Devastates Small Businesses and Family Farms
* Lie #7: The Bush Tax Cuts Helped All Americans
* Lie #8. Extending Bush Tax Cuts for the Wealthy is the Best Way to Stimulate the Economy
* Lie #9. Bush Tax Cuts Produced 52 Straight Months of Job Growth
* Lie #10: The Rich Pay Too Much in Taxes Already
8-03-2010 @ 12:51PM
marty said...
Small Business seems to be the State and Federal Government's prime target for taxing and regulating. Funny how the big corporations seem to be able to escape all of the BS!
8-02-2010 @ 4:00PM
Sally S said...
It's also possible to work as an employee at home. That's what I have done for 10 years. I am not rich, but I do make $30K working 4 hrs a day so I can do my other job (taking care of my home/family). The internet has opened up so many REAL jobs that can be worked from home. BestTopJobs has a FREE list of hundreds of real work at home jobs offered by well known companies. These jobs do NOT cost you money. These are employment positions.
8-02-2010 @ 5:11PM
pnut166 said...
One thing this author fails to mention as a solution to the deficit is CUT SPENDING !
8-02-2010 @ 4:31PM
Don said...
Your premiums aren't taxable. Actually, they are a medical tax deduction and you can claim as a deduction the amount of health insurance premiums you paid if your total medical expense is over 7.5% of your AGI.
And your small business didn't double the cost of your insurance,,,,,the health insurance company you use did that!
8-02-2010 @ 5:07PM
Shane said...
Well "Truth"....lets look at your list for a second....
The day might not be Jan 1 but YES you are going to raise taxes.....you can't hand out all that pork without paying for it......Can you say "Free health care"
Second, yes, Bush tax cuts were across the board inspite of what you libs say. Facts are facts.....
So who are these rich people getting all these tax breaks.....Certainly not poor Democrats like.....Clintons.......Kennedys......Rockafellers? (Spelling?)......lets not forget our homey Obumey......all poor down trodden democrats right?........
8-02-2010 @ 7:05PM
Elvis Lopez said...
All you lazy a$$es collecting unemployment for almost 2 years need to get up and go to work like the rest of us, those who are paying your bills.
8-02-2010 @ 7:32PM
Al Schrader said...
You can't tax people who don't have jobs. Maybe we can tax Chinese workers. They have jobs.....Al-
8-02-2010 @ 7:42PM
George said...
You can thank President Bush for that tax on your health insurance. He talked about taxing the Cadilac plans but instead pulled the rug out from anyone who pays their own premiums.
8-11-2010 @ 11:52AM
FBH1992 said...
Hilarious article. The second paragraph doesn't even address the best option: LOWER GOVERNMENT SPENDING IN CORRELATION TO LOSSES IN TAX REVENUE!
The focus of the article is: tax revenues are down, so how are we going to squeeze more money out of those still working and being productive to support the government employees and unemployed who are an overall unproductive drain on the economy?
What an embarrassment! A 100 years ago, America had no income tax and it was the most powerful and innovative country in the world.
8-26-2010 @ 11:36AM
s said...
FORGET about Taxing Income (working people) Instead the federal government could simply add a ie: 5% to puchases along with regular state sales tax since most buisness already set up to collect taxes that way everyone pays, rich ,poor, illegal,
tourists, under the table money. That way everytime someone buys something every one pays the same percentage on every dollar !
7-29-2010 @ 5:17PM
Chris said...
We need the FAIR TAX reform! By doing away with filing income tax and having the tax added to purchases, EVERYONE pays fairly for what they choose to buy/use - including criminals and illegal aliens! Basic necessities such as unprepared food/paper goods/medicine/utilities should be tax free.
Reply
8-02-2010 @ 3:02PM
Tony Moschetti said...
The Fair Tax is an unrealistic pipe dream. It would require getting rid of the 16th Amendment, the I.R.S., tax attornies, and tax accountants!
Good luck with that one!
But don't worry, if the radical Demo-Rats (all of them) have their way we will get a consumption (VAT) in addition to the income tax!
7-30-2010 @ 6:13AM
Hank Van Gieson said...
Chris, You say we need the Fairtax scheme, but go on to suggest that basic necessities be exempt. That isn't the Fairtax. Instead, the Fairtax provides a monthly prebate in an amount that would offset the sales tax on spending up to the poverty level for each family. That prebate is actually a $600 billion cash grant entitlement coming at a time when entitlements are squeezing out discretionary spending in the federal budget.
In addition, the prebate creates a group of 30 million working families that would pay no net federal tax annually. Compare that to current tax law where less than 1 million workers pay no income tax and can qualify for refundable tax credits (EITC, etc.)in an amount that would totally offset their payroll taxes (7.65%).
30 million versus 1 million! Is having 30 million working families disconnected from the cost of the federal government a good idea? Not in my book!!
Reply
8-02-2010 @ 3:16PM
Janice said...
Please tell me why those who pay no taxes deserve a check from the government. That is called wealth redistribution and I pay enough taxes, thank you very much, and I resent the heck out of those people "getting" a check from me for no other reason than the fact that I go out and bust my butt to make a living and the EITC folks don't.
8-02-2010 @ 4:44PM
Jnichols said...
Shannon: your relative must have worked at sometime last year to get the EITC. The credit is only available to those who have income earned from employment. It's true that a person can receive a refund from the credit even if they paid no money in taxes (because they earned too little to owe taxes after deductions), but they still must have earned money from a job to be eligible. That's the whole purpose of the credit - to reward people for working rather than just collecting welfare.