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).

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Author

Kelly Erb is a tax attorney and tax writer.

Comments

  1. Regarding social security (payroll tax), let’s not miss the fact that benefits, measured as a percent of earnings, drop with higher income. At $75,000/yr, I’d pay twice the tax as a $37,500 earner but not twice the benefit.
    I wrote last year about this.
    http://www.joetaxpayer.com/social-security-benefits-ii/
    At earnings of $30K, SS replaces 48% at retirement.
    But at $60K, SS replaces just 38%, so this wage earner needs to save more to get the same replacement rate of income at retirement.
    Joe

  2. Joe,
    Thanks for the link. After the AMT, I think SS is the most screwed up of all of the federal “taxes” (I know some folks argue it’s not really a tax – blah, blah, blah).

  3. Great job of doing a balanced treatment on this subject, Kelly.

    And I agree that Joe’s point is an important one to bear in mind. It is true that payroll taxes hit low-income folks harder, but the benefit formula is also more progressive as well.

    On the other hand, there are quite a few low-income folks who sadly don’t live long enough to collect much or any Social Security benefits (or Medicare), because life expectancy and income are highly correlated.

    This is especially true for the subset of low income Americans who happen to be smokers, who have also paid a great deal in tobacco taxes. (Economists believe that cigarette smokers pay more in taxes than the costs they impose on society, in large part because they die too young to collect much Social Security and Medicare.)

  4. I’m working, poor and paying a lot of income taxes. Where did I go wrong?

  5. J G, I’m not sure what you mean by poor.

    If you mean that your income is below the federal poverty line, then your federal income tax burden should be less than or equal to zero.

    Last year, the federal poverty line was $10,400/year for a one person household, and it went up by $3,600 for each additional household member, so it would be $21,200 for a family of 4.
    http://aspe.hhs.gov/POVERTY/figures-fed-reg.shtml

    The exact calculation for a household will depend on marital status, age of children, etc. but it’s really hard to see how anyone officially below the poverty level could have a large income tax bill.

    That said, the poverty level is a highly flawed criterion in many ways. For example, it doesn’t take into account the cost of living in different areas. It’s much harder to raise a family of four on $21,200 in NYC than in rural Mississippi, for example. The poverty level also doesn’t take into account whether or not a person has high medical costs, health insurance status, and other important factors.

    If you meet the criteria for VITA assistance (simple tax circumstances and income under $42,000 in 2008), I would strongly encourage you to bring your old tax returns to a VITA site and ask them to check them over to see if there are any tax breaks to which you are entitled.
    http://www.irs.gov/individuals/article/0,,id=107626,00.html

  6. To say that the “working poor” pay social security taxes is a misleading statement. If a single parent with just one child has an income (as an employee) of $10,000 there is aproximately $750 withheld for social security taxes. However the parent receives aproximately $3000 in earned income credit. So was it the parent that paid the social security taxes or those that pay the income taxes that allow the government socialists to redistribute?

    Effective 2009 parents can get earned income credit on three children instead of two. The child tax credit is refundable with just $3500 income.
    Therefore a person earns about $10,000 will get a refund on tax return almost as much as they made “working” all year. And someone actually believes that person paid the $750 worth of social security taxes? And someone actually believs that person paid the sales taxes through out the year?

    We have had terrible corruption for many years over the democrats socialist earned income credit. We have had a situation encouraging parents to not be married for many years, as a result of the same programs. Now for the year 2009 with the new program on 3 children, the corruption will again go up exponentially.

    Jeff Day

  7. Taxgirl.You may find it interesting to delve into the Gov mandated cost of the W-comp premium which can reach in excess of 30% on top of wages.That cost,similar to FICA and other Fed and State mandated expenses,is paid VIA biz but paid FOR by THE CONSUMER to the ultimate disadvantage of domestic biz because these costs are passed on THRU biz to the consumer to the advantage of China. Your thoughts? You can reply via my email if you prefer.
    Later. RAY

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