Wednesday, August 24, 2016

Forty-Four Percent of Americans Do Not Pay Federal Income Taxes

“I can see my tax dollars are hard at work!”

We’ve all heard it before.  It’s usually said sarcastically in response to the latest scandal involving politicians, teachers, police officers, or other public servants.  There is a pervasive idea in American culture that the customer is always right.  The benefits and drawbacks of this viewpoint are many and varied, and could be debated endlessly, but the fact that we feel like we deserve honesty and integrity from the people that are paid through our taxes will likely never be completely eradicated from our collective conscience.

What if the premise of that argument wasn’t even true, though? 

According to Roberton Williams, the Sol Price Fellow at the Urban-Brookings Tax Policy Center, about 44 percent of Americans pay no federal income taxes. 

“Either you’re too poor or you benefit from these various provisions in the code,” he said.  The provisions he is referring to are called refundable tax credits – which can not only bring your taxable income down to zero, but any remaining funds in the credit can actually be refunded to you.  The Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit (for high education costs) are all refundable credits.

On top of these credits driving up the number of Americans who pay no federal income tax, individual taxpayers who are younger than 65 are not required to file a return if their gross income was less than $10,300 (that number is doubled for married taxpayers).

The Tax Policy Center expects that the percentage of Americans paying no federal income tax will gradually decrease, predicting that about 40 percent of taxpayers will pay nothing in 2026, according to data released July 11.

Part of this prediction is based on the fact that about half of Americans didn’t pay income tax during the Great Recession (2007-2009), partly because of tax provisions that were included in the American Recovery and Reinvestment Act of 2009.  The Tax Policy Center anticipates that over the next decade, the American economy will continue to strengthen, and taxpayers will be in better financial positions.

So, where is all of the money going that is being taken out of your paycheck every two weeks?

While nearly half of Americans don’t pay federal income tax, most still have it withheld from their paychecks (which is why many Americans receive a tax return – they have “paid” through these withholdings, but ended up owing little to no income tax, so that amount is refunded to them). 

Additionally, about 60 percent of taxpayers paying no income tax will work and owe payroll taxes that support Social Security and Medicare.  Only about 9 percent of households qualify for credits that fully offset their payroll tax.
“The fact they don’t pay income tax isn’t the only thing in the world,” Williams said. “There are lots of other taxes – property taxes, sales taxes and excise taxes – that are pretty hard to duck entirely.”

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