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).
My inbox is crowded with queries from retirees asking me when the $250 economic recovery payments (some folks also refer to them as additional “stimulus checks”) will be mailed out. Well, I finally have an answer. Vice President Joe Biden and Michael Astrue (the Social Security Commish) have announced that checks will be mailed in May.
But wait. Don’t get too excited. Not everyone gets one. This is a one-time payment of $250 to adults who are receiving Social Security benefits, including SSI recipients, but not including those receiving Medicaid in care facilities such as nursing homes. Disabled children who are receiving SSI benefits are also eligible.
To be eligible, you have to live in one of the fifty states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.
You don’t have to do anything to get your check. You must simply be eligible for Social Security or SSI during November 2008, December 2008 or January 2009 and otherwise meet the residential and other criteria.
Of course, I keep saying “check” but you might not be receiving a check. Your payment will be delivered the same way that you currently get a benefit. If you normally get a check, you’ll get a check. If you receive your benefits via direct deposit or debit card, you will receive your one-time payment the same way.
Veterans Affairs (VA) and Railroad Retirement Board (RRB) beneficiaries will also receive a check. However, if you receive Social Security and SSI, as well as VA or RRB benefits, you’re only going to get one check. There’s no double dipping.
While the checks are expected to be distributed beginning in May, you’ll need to be a little patient. About 50 million folks will be getting the checks – and you know that’s going to take some time. The Social Security Administration has asked that retirees not call them unless a payment is not received by June 4, 2009. June 4. Put it in your calendar. And please don’t bother the poor folks before then – they’re not going to be able to help you.
Taxpayer asks:
What a great service. Hope I can explain this good enough. I have been disabled for 3 years, have received disability income from a private insurance company. This was not taxable because I paid the premiums. Was approved for disability end of 2008 and got a lump sum check. Had to then send the total proceeds to Hartford Ins. since they had paid me more than SS will. Now, do I have to pay tax on the money received from SS?
Taxgirl says:
Good news! You may get a break on this one.
Hopefully, your Form SSA-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. Your net benefits should be reported to you as be a negative number at box 5.
If you itemize, you’re entitled to a deduction for the difference (box 5). If that amount is $3,000 or less, it’s considered a miscellaneous deduction subject to the 2% AGI limit. You’ll take that deduction at Schedule A, line 28.
If the amount is more than $3,000, you may be able to claim a tax credit instead. The hoops you have to jump through are a little ridiculous (did I say/write that out loud?) – you can find the formula in IRS Publication 915. There are a lot of calculations involved; it requires you to recalculate tax from prior years to figure the credit. It’s a tricky calculation so I highly recommend getting some assistance from a tax pro – you don’t want to pay more than you need to!
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:
Hi, I work for a company and am currently deployed to Iraq. I had met the Social Security Cap for withholding mid 2008 and mid year was transferred to our subsidiary. They again withheld my Social Security to the Cap so in effect I paid double the amount I should have. Can I get that overpayment returned from Social Security and if so, how?
Thanks,
Taxgirl says:
The earnings cap for Social Security withholding is $102,000 for 2008 (it’s $106,800 for 2009). There is no earnings cap for Medicare withholding – all wages are subject to Medicare tax.
The overpayment issue depends on the identity of the employer. If you had more than one employer and you had too much Social Security withholding, you may be able to claim the excess as a credit against any income tax due. You’ll claim this on line 65 of your form 1040 (see image below). You’ll add the overpayment together with any estimated payments and credits and subtract those from the tentative tax due. If your overpayment, estimated payments and credits exceed your tax due, you’ll receive a refund.
However, if any one employer withheld too much Social Security withholding, you should not claim this on your tax return: your employer should make an adjustment for you. If the employer does not make an adjustment, you can use Form 843 (available here as a pdf) to claim a refund.
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!
