According to the Tax Policy Center, 46.5 of all tax payers will not pay any federal income tax in 2011. Not only will they not pay into the system, but some will actually get money out of the system without putting in a dime. I hear it on the news, I’ve read articles about it, and I am ready to grab a pitch fork and join the angry mob that is forming against these people that are draining our system.. “How is this possible?” I asked myself. I wanted to find out more about who these people were and how they were avoiding paying their fair share of taxes.
First I made up a spreadsheet based on the numbers from the Tax Policy Center. I wanted to see what the demographics were for each of the financial categories. Then I decided to fire up Turbo Tax 2010 and explore fictitious cases for the largest demographic groups in selected financial categories to see how they made out in 2010. Here’s how things fell:
Under $10,000 – 24,300,000 or 31.9% will not pay income tax.
79% single, 7% married, 14% Head of Household, 16% have children, 13% are elderly. Many that fall into this group could be students, workers who just started and only worked part of the year, elderly that just started on social security and haven’t received it for the full year.
2010 Case 1: Jeffrey is a college student trying to work his way through college. He has taken out student loans, and is paying the interest on them. He earned $9,000 and paid no taxes because of the personal exemption, education credits and deductions for the interest on his loan.
$10,000 – $20,000 – 22,836,000 or 30% will not pay income tax.
65% single, 12% married, 23% head of household, 25% have children, 38% elderly.
2010 Case 2: Jane is a 67 year old retired widow who collects $1,400 in social security or $16,800 a year. She took $10,000 from her IRA. Her total income is $26,800 a year, but she is only taxed on 1/2 of her social security, and after adding in that amount with the $10,000 she is still below the $25,000 limit for a single person on social security. Therefore, she paid no taxes.
$20,000 – $30,000 – 12,653,000 or 16.6 will not pay income tax.
43% single, 22% married, 35% head of household, 45% have children, 32% elderly
2010 Case 3: Marie is a single unmarried mother with two children. She works at low paying job, but is going to school to better her future. She earns $25,000 a year, and took out a loan for a $3,000 course in medical terminology. She can deduct her tuition and interest, and gets $2,479 in Earned Income Credits as well as $2,000 for the Child Tax Credit. She also received a Making Work Pay credit of $800. She paid no taxes, and got $3,834 back from the government.
$30,000-$40,000 – 7,112,000 or 9.3% will not pay income tax.
18% single, 43% married, 39% head of household, 61% have children, 23% elderly.
$40,000-$50,000 – 4,188,000 or 5.5% will not pay income tax.
7% single, 71% married, 22% head of household, 58% have children, 31% elderly.
2010 Case 4: Bob has a job making $30,000. Gale earns about $15,000 as a school aid. They have two children. He received an Earned Income Credit, Making Work Pay and a the Child Tax Credit. They own a home and were able to deduct mortgage interest and property taxes. They paid no taxes and received $947.00 back from the government.
$50,000-$75,000 – 2,858,000 or 3.8% will not pay income tax.
9% single, 77% married, 14% head of household, 66% have children, 23% elderly.
2010 Case 5: Gerry has a $60,000 job, his wife Kay is a stay at home mom. They have a modest house with a mortgage, and four children. They paid no taxes and received $1,629 from the government because of the personal exemptions, dependent child credits, making work pay credits and the standard deduction.
$75,000 – $100,000 – 723,000 or .9% will not pay income tax.
11% single, 82% married, 7% head of household, 68% have children, 16% elderly
$100,000 – $200,000 – 381,000 or .5% will not pay income tax.
20% single, 75% married, 5% head of household, 45% have children, 21% elderly.
2010 Case 6: Ted and Kelly have three children. Ted earns $50,000 and Kelly earns $50,000. They own a $350,000 house with a mortgage They just bought an energy efficient Chevy Volt, and got the full energy efficient car credit of 7500 plus $2,100 off for the new car tax. They also spent $2,000 on new energy efficient doors and windows. They have to send their youngest two children to day care, but get to deduct that cost. They paid no taxes and received a check for $1,665 from the government.
$200,000-$500,000 – 81,000 or .1% will not pay income tax.
22% single, 77% married, 1% head of household, 41% have children, 23% are elderly.
I tried to provide sample cases for those earning over $200,000, but I couldn’t come up with enough tax breaks to get them down to 0. I guess that the 110,000 people that earned $200,000 to over $1,000,000 that paid no taxes can afford some pretty good tax accountants.
$500,000 – $1,000,000 – 22,000 or less than .01 percent will not pay income tax.
18% single, 68% married, 14% head of household, 40% have children, 23% are elderly.
More than $1,000,000 – 7,000 or less than .01 percent will not pay income tax.
15% single, 85% married, 0% head of household, 42% have children, 14% are elderly.
What can we surmise from this study?
The current tax code is giving lots of extra credits as well as a generous personal exemption and standard deduction to all tax payers. Therefore, the poor shouldn’t be demonized for not paying taxes. Considering that there are so many elderly and people with children earning below $20,000 I would expect that the 61% comprising this group would not have to pay taxes. Between the personal exemptions, child tax credits, earned income credits, and the social security exemptions, this group often becomes relieved of any tax burden. Also, let’s not forget that all of these people still have to pay payroll taxes, excise taxes and perhaps state and local taxes.
The tax code definitely favors families with children, students and senior citizens. It also gives incentives to work, and promotes energy efficient homes and cars through cash rewards. These are simple values that most of us support, but it may be questionable if the tax system should be the mechanism to promote these things.
It is not that hard to make money from the system – not pay any taxes and still get money back. It was easier than you would expect in brackets $50,000 and above. I didn’t even think it would be possible in the $100,000 but it was. This seems wrong, and probably needs to be addressed. I don’t think any tax system should pay you back money once you have reached 0 tax liability.
Perhaps the tax code does need to be reformed to make things more fair and generate more much needed revenue. However, fair is the key word. Nobody that works and falls into the defined poverty levels should have to pay taxes. However tax reform unfolds, those who can pay their fair share should, but we should not put an unfair burden on those who can’t afford it and we should not unfairly burden those who can.