- According to the Urban-Brookings Tax Policy Center, more than 76 million Americans don’t owe federal income tax for the 2018 tax year.
- That’s compared to more than 95.6 million Americans who owe an income tax of at least $5 and must file a tax return with the IRS.
- Some Americans don’t owe taxes on their income because it is too low; the deductions and credits available to them wipe out their tax liability.
- Some low-income households end up with a negative tax bill and receive a refund thanks to tax credits.
- Still, many people who don’t pay federal income tax do work and owe payroll taxes, which support Social Security, Medicare, and unemployment insurance.
While the first part remains true today (we have yet to crack the code on eternal life), taxes on income are not certain for every American.
According to the nonpartisan Urban-Brookings Tax Policy Center, more than 76.4 million Americans, or 45% of total tax units (one unit is equal to either a single filer or one married couple filing jointly) have a zero or negative income tax bill for the 2018 tax year. That’s about 4 million more tax units than the previous year, an increase attributable to the Tax Cuts and Jobs Act.
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“The large percentage of people who don’t owe federal income tax is a feature, not a bug, of the revenue code,” write the Tax Policy Center’s Philip Stallworth and Daniel Berger. “By design, the federal income tax always has excluded a significant fraction of households through a combination of personal exemptions, the standard deduction, zero bracket amounts, and more recently, tax credits.”
Not “losing” a portion of your paycheck to taxes may sound nice to some, but it’s not a luxury.
Millions of Americans don’t owe taxes on their income because they don’t earn enough money. Their tax liability after taking the standard deduction – $12,000 for singles, $18,000 for single parents, and $24,000 for joint filers – is often wiped out by the tax credits available, Gary Burtless, a senior fellow at the Brookings Institution, told MarketWatch.
While the more than 95.6 million Americans who owe federal income tax of at least $5 for the 2018 tax year must file a tax return by April 15, those with a zero or negative tax bill aren’t required to file, unless they want to claim refundable credits.
“The Urban-Brookings Tax Policy Center estimates that in 2018, households in the lowest income quintile have a negative average income tax rate as a result of refundable credits – namely the earned income tax credit (EITC) and the child tax credit (CTC). That is, the payments the lowest-income households receive from refundable credits exceed any income tax they owe,” the Tax Policy Center’s tax briefing book reads.
How a negative tax bill could turn into a refund
Consider this example of a woman who doesn’t owe federal income tax and will likely end up with a refund:
Amy is a single mother who earned $20,000 in 2018. The standard deduction of $18,000 for single parents reduces her taxable income to $2,000, which places her in the 10% tax bracket ($0 to $9,525). Her tax bill comes out to $200.
If she qualifies for the earned income tax credit (EITC), a subsidy for low-income working families, she can reduce her tax bill by up to $3,461, the maximum for a family with one child. She may also claim the child tax credit (CTC), which allows her to apply a credit of up to $2,000 to her tax bill.
Amy will end up with a negative final tax bill, and since EITC and CTC are refundable, she’ll receive the credits as cash.
But while Americans who earn too little don’t pay income taxes, those who hold a job are still subject to payroll taxes, which support Social Security, Medicare, and unemployment insurance. According to Tax Policy Center data, 26.7 million Americans owe neither income nor payroll taxes for the 2018 tax year. However, some taxes are certain for everyone, regardless of income, including sales taxes, excise taxes, and property taxes.