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Pronto Tax Class Blog

How Many Households Pay No Income Tax?

By Tim Frye

Everyone loves to use the old adage that in life there are only two things for sure, death and taxes regardless of creed, color, or religion. It is a saying that that pains us, and concurrently a saying that binds us.   In a large amount of households, paying income tax is not the norm. As of the most recent analysis from the The Tax Policy Center, the percentage of households that pay no income tax fell from 47% in 2011 to 43% currently. Let’s dive into the specifics of these statistics…

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43% of Households Pay No Taxes At All?

The statistics on the number of households that pay zero income tax may be inflated if someone is not intimately familiar with the U.S. taxation system. Though these people pay zero income taxes at the end of the year when they settle up, we must not forget that they are still taxpayers. They are still paying payroll taxes, with the social security tax portion of the payroll tax being 6.2 of earned income. Medicare tax is 1.65 of earned income, and they may be paying other taxes as well such as state, local and sales taxes. In this study, 29% of this 43% pay no federal income tax but still are subject to the payroll and other taxes. So it is a bit of a misconception to think that the entirety of the 43% pay no taxes at all and are despicable Americans.

Do All Low Wage Earners People Pay No Income Tax?

We have all heard of it. The big refund weighing out at numbers beyond ten thousand dollars. Yes, people do receive these type of tax refund checks, and sometimes this check could literally be half of their yearly income. The Earned Income Credit and Child Tax Credit could boost a low to moderate income wage workers return to a sustainable income. So not only are these people not paying taxes, they are actually benefiting greatly from the tax system and its credits. It is important to note that in most or all cases the person is working hard every day but is just not making good money. This is technically not welfare. It is reward for those who support multiple dependents and work hard while doing it. The system was developed by President Jimmy Carter in the late 70s to accomplish exactly that.

Do People with Income Above 200,000 Pay a Lot of Income Taxes?

As one can see, from the outside looking in, there are many assumptions from people regarding who pays income tax and who doesn’t. It is difficult to take an objective look at a person’s income levels and assume they are going to pay a certain level of income tax. Only their CPA or tax preparer would know exactly what they pay at the end of year, when all accessible and appropriate deductions and credits have been applied. There are actually thousands of people that make over 200.000 but still zero out their tax liability by having tons of deductions, and in some cases valuable credits. Generally, since their gross income is that high, they are would end up in high marginal tax brackets, so the usage of deductions would be more valuable than using credits.

The debate over why some people get to skirt their income taxes has carried on for many decades, and will surely rage on. After assessing the number of households that pay no tax at 43%, the specifics were in fact telling a different story. In the end, regardless of what happens at the end of the year, we are getting taxes taking out of our checks before we see that money. And if you need to do your income taxes, it means you must be making INCOME, which is hard enough in these trying economic times.