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).
Taxpayer asks:
“Rude surprise for taxpayers
Millions of people who are enjoying President Obama’s tax credit will need to return some of it.” http://finance.yahoo.com/news/INSIDE-WASHINGTON-Rude-apf-15091434.html?.v=1 Per the Yahoo News
I read the article and not sure what to believe. Are their problems ? Should we withhold extra to get the same amount back assuming all household/Income things stay the same as last year ?
Thanks,
Concerned about tax tables
Taxgirl says:
Apparently Yahoo and MSN were both late to the game on this one. I’ve received two questions this morning related to their articles.
This is not a new concern. It’s not that the tax tables are wrong – it’s that your individual circumstances cannot always be accounted for in a table. Some people will have circumstances that might cause them to get too much credit – you can read all about it in my prior post.
But it’s important to understand that this isn’t a flaw in the tables that’s just been discovered or a fluke that wasn’t previously accounted for – tax professionals have know about this for a bit now. I blogged it in March, as did many of my colleagues. Yahoo and MSN aren’t breaking news – they’re just playing catch up.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
What about a taxpayer who owes the IRS $$$ from previous tax years? Should they adjust their W-4 to have more taxes taken out to cover the Making Work Pay credit that will be on their paychecks?
Taxgirl says:
It depends. The Making Work Pay Credit is refundable, so to the extent that the withholding results in an overpayment at the end of the year, taxpayer would be entitled to a refund. The refund would, of course, be offset if there are existing tax liabilities. If withholding is adjusted to ensure that there’s no refund, then the refund would not be used to satisfy the existing tax liabilities.
Of course, that doesn’t change the outstanding liability. I often recommend that taxpayers with outstanding liabilities who receive a refund at the end of the year not alter their withholding. Most taxpayers don’t notice the few extra dollars each week and the refund helps pay down the liability. Most taxpayers in that situation wouldn’t save on their own in order to pay it down, so this “forced savings” can be a good thing.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
I was told that I would receive all my federal tax withholding for April, May & June. However, I just heard on the local news that it would only be $12 to $15, is that true?
Thanks for your advise,
Taxgirl says:
The Making Work Pay Credit will decrease the amount withheld from your paycheck by the applicable credit amount. For most individual taxpayers, this means there will be approximately $12-15 extra in your check each week. This could vary, depending on your pay and number of exemptions claimed; affected taxpayers may see less money withheld but should not see more.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
