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Thursday, August 12, 2010

Who Doesn’t Pay Income Taxes?

Thomas L. Hungerford
Specialist in Public Finance

April 2010, it was widely reported that 47% of American households owed no income tax for 2009. This finding is based on estimates produced by the Urban Institute-Brookings Institution Tax Policy Center. The Tax Policy Center also estimates that 48.5% of tax units paid zero or negative taxes in 2008, and about 38% in 2006 and 2007. This report provides information on the demographic characteristics of people paying no federal income tax in 2008 and compares this group to taxpayers. 

Not everyone with income pays income taxes. In calculating taxable income, taxpayers are allowed to subtract the standard deduction or itemized deductions (e.g., mortgage interest, state income taxes, and charitable contributions) from adjusted gross income (AGI); the standard deduction for a couple in 2008 was $10,900. Taxpayers are also allowed to claim a $3,500 exemption for each person in the tax unit and dependents. Furthermore, some income is excluded from the calculation of AGI, such as public assistance benefits (e.g., Temporary Assistance for Needy Families and Supplemental Security Income), some or all of Social Security benefits, and pension contributions. 

The 2008 tax year was different from the previous few years because of the severe recession beginning in December 2007. During a recession taxable income falls as workers lose jobs or have their work hours reduced. In response to the recession, the Economic Stimulus Act of 2008 (P.L. 110-185) was enacted, which provided for recovery rebates. Recovery rebates were tax credits of up to $600 ($1,200 for joint returns) that were sent to taxpayers in mid-2008. Recovery rebates reduced tax payments for many taxpayers and eliminated tax payments for some tax units. 

The tax units paying no income taxes are likely to be low or moderate income—a majority live in families with income below 200% of the poverty threshold. These tax units are more likely to be elderly and receiving Social Security benefits than tax units paying taxes. Many of these tax units have their tax liability eliminated because of the various tax credits, such as the earned income tax credit (EITC), the child tax credit, and the recovery rebate. It is likely that the proportion of tax units paying no income taxes will remain at about 45% through at least 2010 because of the Making Work Pay tax credit, which was enacted in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Those tax units that legally pay no taxes (the tax units considered in this analysis) do so because of income exclusions, deductions, and tax credits introduced into the tax code over the years.

Date of Report: August 6, 2010
Number of Pages: 11
Order Number: R41153
Price: $29.95

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