Wednesday, November 28, 2012

How People Pay No Federal Income Tax

Why Do People Pay No Federal Income Tax categorizes who the people are that pay no federal income tax. So here's how the 47% avoid paying federal income tax:
  1. Elderly tax benefits.   This group accounts for almost half (44%) of the 47% that don't pay federal income tax. If people live only on Social Security or 1/2 the Social Security payment + income is less than specific thresholds, the taxpayer owes no federal income tax on the Social Security payments. In addition, if a senior couple 65 or older has an AGI of $21,800 or less, the couple has 0 taxable income due to the standard deduction and two exemptions.
  2. Low income or child tax benefits.  This group accounts for almost a third (30%) of the 47% that don't pay taxes.  A married couple with two children would not pay any federal income tax if they earned less than 45,775.  Below that amount, the couple would receive additional funds via the Earned Income Refundable Tax Credit in addition to paying no federal income tax.  Also, for every additional child, the couple could earn an additional $10,000 without paying any federal income tax.
  3. Deductions and other tax credits.  This group is about a quarter (26%) of the 47%.  To eliminate tax liability, this group uses above the line deductions (e.g. IRA deductions), exclusion of cash transfers (e.g. child support), other tax credits (e.g. education),  high itemized deductions (e.g. high medical expenses), tax exempt interest, and 0% capital gain and dividend rates.
While these people do not pay federal income tax, they may pay FICA or other retirement savings tax, state income tax and/or state sales tax, and other applicable local taxes.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2012 Achievement Catalyst, LLC

1 comment:

CHris said...

A women with one child making 35K would probably get 3K refundable credit. A quick ball park figure

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