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.”

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.”

New South Carolina Law Authorizes Tax Amnesty Program

The new South Carolina law authorizes the South Carolina Department of Revenue (“Department”) to designate an amnesty period which has a beginning and ending date as determined by the Department. 

During the amnesty period, the Department  can waive potentially 100% of all interest and penalties if the taxpayer complies with the program.  Amnesty will be granted to taxpayers that request an amnesty form and voluntarily file all delinquent tax returns and pay in full all taxes due; voluntarily file an amended tax return to correct an incorrect or insufficient original return and pay all taxes due; or voluntarily pay in full all previously assessed tax liabilities due within an extended amnesty period as determined by the department. The department may set up installment agreements so long as all taxes are paid within this period.

A taxpayer who has an appeal pending with respect to an assessment is eligible to participate in the amnesty program if the taxpayer pays all taxes owed. However, amnesty will not be granted to a taxpayer who is the subject of a state tax-related criminal investigation or criminal prosecution.

IRS to Provide Guidance for Marijuana Retailers

The IRS Office of Professional Responsibility plans to release guidance in the first quarter of 2015 for practitioners working with marijuana retailers in states where the business is legal. The practitioners are pushing for the IRS to issue guidance clarifying that a tax professional will not be considered unethical, targeted for audit or be considered in violation of Circular 230 rules solely for preparing a return for a marijuana business. Although some states now allow the sale of marijuana, those sales are still illegal under federal law.  Because the sale of marijuana is an illegal activity under federal law, the cost of goods sold will be an issue as drug dealers are never allowed to claim a cost of goods sold.  In addition, there are related issues such as deductions dependent on whether the sale of marijuana is a trade or business of cultivating or sale, or whether it's a subsidiary trade or business that just happens to have a connection.  Indeed, if the IRS does not allow COGS or Section 162 deductions, the tax bills could be a major hurdle.

Long Waits for IRS Practitioners

The average time it will take for tax practitioners to get through to the Internal Revenue Service on their dedicated practitioner phone line in 2015 is projected to be 52 minutes, National Taxpayer Advocate Nina Olson said on November 4, 2014.  Ironically, the IRS calls the dedicated line the "Tax Practitioner Priority Hotline."  There's nothing "priority" or "hot" about that 52 wait and could be slower than the DMV.

A Step Forward for Captive Insurance - Securitas Holdings

In the matter of Securitas Holdings, Inc. v. Commissioner,  T.C. Memo. 2014-225 issued today by the the U.S. Tax Court, the Court found that Securitas had established a bona fide captive insurance arrangement among its U.S. companies and was entitled to interest expense and premium deductions.  As with all true insurance companies (which most captive arrangements are if done for business purposes), the  captive arrangement shifted risks, distributed risks, and constituted "insurance" in order to make the premiums deductible.  

Indeed, if a captive insurance company is applicable to your holding company structures, the tax and premium benefits may be substantial.  This Office is happy to answer any questions that you may have concerning captive insurance arrangements.

The opinion of the Court can be found at this link:
http://ustaxcourt.gov/InOpTodays/SecuritasHoldings,Inc.Memo.Buch.TCM.WPD.pdf

South Carolina Needs To Change Its Tax Climate - Tax Rankings Released

South Carolina is standing in the shadow of North Carolina (as well as the rest of the country) and needs to take the necessary steps to make the State more tax competitive to draw business as well as individuals.  Currently South Carolina received the following rankings from the Tax Foundation's 2015 State Business Tax Climate Index.  http://taxfoundation.org/sites/taxfoundation.org/files/docs/TaxFoundation_2015_SBTCI.pdf

South Carolina Overall Rank - 37th

Corporate Tax Rank - 13th

Individual Income Tax Rank - 41st 

Sale Tax Rank - 18th 

Unemployment Insurance Tax Rank - 40th

Property Tax Rank - 21st 

From these rankings its clear there needs to be substantial changes to the individual income tax and unemployment insurance tax regimes in South Carolina. North Carolina made the single largest annual jump in the history of the rankings to No. 16 from No. 44 by lowering its corporate and individual income tax and its sales taxes.  South Carolina should take the cue as there is no reason for us to be in the bottom percentile.