The good news: nearly 50% of American households (47%, to be precise) won’t pay any federal income tax in 2009.
The bad news: the remaining 50% (or so) will have to foot the bill for everyone.
You can thank (or blame) the new economic recovery package for bumping the percentage of taxpayers who won’t be paying a wee bit higher (about 10%).
But don’t just start pointing fingers at the working poor. While it’s true that the majority of those who are paying no federal income tax this year make below $30,000 annually, up to 10% of households making between $75,000 and $100,000 also qualify. New tax breaks, refundable credits, exclusion of a portion of unemployment benefits and state and local sales tax deductions account for much of the zero income tax for 2009.
It’s important to note that these figures don’t include payroll taxes (Social Security and Medicare). On average in 2009, taxpayers will pay an average of 8.4% of their income in payroll taxes. If you take those taxes into account, only 24% of households will pay no tax.
Payroll taxes often get left out of the “who pays tax?” equation. While it’s true that the top percentage of wage earners pay most of the federal income taxes as a percentage of income, they are also among the lowest in terms of payroll taxes. The top 1% of income earners report 16% of total income but pay less than 4% of payroll taxes. That’s because contributions for Social Security are capped at $106,800. If you make more than that, the overage is not subject to Social Security; this is referred to as a regressive tax (our “regular” income tax system is said to be progressive). Additionally, much of the unearned income in the country (dividends, etc.) is attributable to the very wealthy; unearned income is not subject to payroll taxes.
The lower 60% of income earners report 25% of income but pay about 33% of payroll taxes. Those somewhere in the middle pay the rest (of course).
How does this play out in terms of averages? In 2009, the average federal tax rate paid as a percentage of income in the US is 18.2%. The top 0.1% wealthiest taxpayers will pay an average of 27.9% (not as high as I would have guessed) while the very poorest taxpayers actually “pay” a negative tax (this is due to refundable credits like the EITC and the Making Work Pay credit).
In terms of all federal taxes, and not just income tax, the top 20% of income earners will report more than half of total cash income but will pay a whopping 2/3 of all federal taxes (including income, estate, etc.).
Of course, this data can be manipulated a million different ways (look, I already started!) and you can bet it will continue to be throughout the next election. For now, it’s just something to munch on. You can read the entire Tax Policy Center report here (downloadable as a pdf).
Robert D Flach, the internet’s “Wandering Tax Pro“, writes:
If I ruled the world, or at least had a voice in rewriting the Tax Code, not only would every man be as free as a bird and every voice be a voice to be heard, but I would also make the following changes to our current convoluted tax system to remove some of the its “inequities” –
1) First and foremost I repeal the dreaded Alternative Minimum Tax (AMT).
2) I would do away with “refundable” tax credits, such as the ones for Earned Income Credit and the Child Tax Credit. Refundable tax credits breed tax fraud. I would take a long, hard look at the Earned Income Credit, which is really a welfare program.
3) I would do away altogether with the “marriage tax penalty” by making the filing status “Married Filing Separately” equal in every way to that of “Single”. No longer would any tax benefits be unavailable to married taxpayers choosing to file separately – and the Tax Rate Schedule (and corresponding Tax Tables) for MFS would be the same as the one for Single. The filing status would be renamed “Married, But Filing as Single”. I would probably also reduce somewhat the “marriage tax benefit” so that the Tax Rate Schedule for MFJ is closer to that of Head of Household.
A couple choosing to file separately would be able to file a “2-column” Form 1040 (or 1040A) – so that they could report their individual items of income, deduction and credit separately, but end up with one net refund or balance due amount. This is similar to the way I remember the New York State income tax return to be when I first started out in the business.
4) I would allow taxpayers to “carry back” as well as “carry forward” net capital losses in excess of the annual maximum deduction (which would now be annually adjusted for inflation) to apply against gains in prior years. I would probably have a three-year carry back period.
This idea came about because many of my clients had reported and paid a substantial amount of federal, and state, income tax on six-figure capital gains, most short-term, in 1999 and 2000, but when everything turned around in 2001 and 2002 they had six-figure capital losses. The bottom line was that over a 2 or 3 year period of investment activity they had a net capital gain of about “0”. But they had been highly taxed in the years they had gains – and were only able to deduct a maximum of $3,000 in the years they had losses, with the excess loss “carried forward”. Unless these taxpayers would have a big score in future years they would never be able to fully claim all of the losses in their lifetime. This same situation occurred again in 2007 and 2008.
5) I would make all items of deduction indexed annually for inflation. If we are going to index some items we should index them all. I believe the $25 limit on business gifts has remained unchanged for as long as I have been doing taxes – over 37 years – and the $3,000 limit on deductible net capital losses has been the same for decades.
6) One current inequity in the Tax Code is that a person who wins a legal settlement, award or judgment, except in the case of a claim for unlawful discrimination, must report the gross amount as income on Page 1 of the 1040, which increases AGI and adversely affects a multitude of deductions and credits, and deduct the associated legal costs as a miscellaneous itemized deduction subject to the 2% of AGI reduction. In these cases a person could be awarded $300,000 but only end up “in pocket” $100,000-$150,000 after the lawyer takes his chunk.
In the case of claims for unlawful discrimination the associated legal fees and court costs are allowed as an “above-the-line” adjustment to income, so that the AGI properly reflects the true economic reality. I would allow the same adjustment to income for the corresponding costs of all settlements, awards and judgments.
7) I would permanently remove all of the income and “employer plan covered” restrictions on deductible IRA contributions and ROTH IRA contributions.
8) I would do away with the deduction for depreciation of real property. I discussed this idea in detail in my post “HYPERLINK “http://wanderingtaxpro.blogspot.com/2007/11/here-is-something-to-think-about.html” Here Is Something to Think About” { HYPERLINK “http://wanderingtaxpro.blogspot.com/2007/11/here-is-something-to-think-about.html” http://wanderingtaxpro.blogspot.com/2007/11/here-is-something-to-think-about.html} at THE WANDERING TAX PRO.
9) One minor item that irks me is that the standard mileage allowance deduction for using your car for doing volunteer or charity work is not set by the IRS along the same lines as the SMA for business, medical and moving use – but is set by Congress. Except for a temporary increase a few years ago restricted to driving related to Hurricane Katrina relief, this number, currently only 14 cents per mile, has not been raised in years. It should be the same as the allowance for medical and moving travel.
10) I would call for re-establishing something similar to George W’s “President’s Advisory Panel on Tax Reform” to carefully review all options. I would have them report their findings directly to Congress, and would take their findings seriously.
And that is only the beginning!
Oh well – I can dream, can’t I?
David Smith writes:
If I could make one change in the tax code, I would eliminate any benefits for having children. I chose to be single. I chose not to have children. I am appalled to see how much our tax system subsidizes having children. It is welfare, just put forth another way.
I already pay property taxes in my state. Those property taxes are used to pay for schools to educate children that I don’t have. I understand that education is something that benefits society, so I don’t mind.
I feel similarly about programs that pay for medical insurance for children. I do think all children should have medical insurance.
But I don’t think that anyone should receive extra tax benefits because they chose to have children. It was especially annoying to see that Congress offered extra stimulus checks per child last year. Combined with extra exemptions and the earned income tax credit, people with children get huge breaks when it comes to taxes. I don’t think this makes sense and I don’t think it’s fair.
As the economy continues on its wild ride, the IRS has announced a series of adjustments for tax brackets and other provisions for the 2009 tax year. These adjustments, in response to inflation, are required by law.
Note that these adjustments will affect your 2009 tax return, normally filed in early 2010. Your 2008 tax return (filed in 2009) is not affected.
Here are a few key tax provisions which have been adjusted for inflation:
Personal and Dependency Exemptions. Personal exemptions and those available for dependents will increase $150 to $3,650.
Standard Deductions. The standard deduction for married couples filing jointly will increase by $500 to $11,400. The standard deduction for singles and married couples filing separately will increase by $250 to $5,700. The standard deduction for head of household will increase by $350 to $8,350.
Kiddie Tax Threshold. The threshold for the kiddie tax will increase by $50 to $950.
Tax-bracket thresholds. Tax-bracket thresholds will increase for each filing status. I’ll post the new tax tables as soon as I can.
Earned income tax credit (EITC). The maximum EITC for families with two or more children will increase by $204 to $5,028. The income threshold in order to qualify will also rise: for joint return filers with two or more children, the threshold will be $43,415.
Gift Tax. The annual gift exclusion will rise by $1,000 to $13,000.
401(k) Contribution Limit. The 401(k) contribution will rise by $1,000 to $16,500.
It’s worth noting that there are some other adjustments, including those for retirement plans/contributions. Keep watching for specific information.
