Estimates by The Tax Policy Center show that 61% of U.S. households pay no federal incomes taxes.
Before you go off on a rant about the rich not paying their fair share of taxes by using tricky tax-dodging tactics, the reality is that many people are too poor to pay taxes.
Why the Majority of Americans Pay No Taxes
Ask around America and you’ll find an impression of taxes and the IRS as heartless thugs that squeeze the poor to get money for the “king” back in Washington D.C. This impression is carefully cultivated by politicians as a way to garner votes by saying that you pay too much in taxes and get too little in return. The truth is that there is a lot of compassion built into the tax system.
Poor People Don’t Pay Taxes
What most people don’t realize while they scream at the rich for not paying their taxes and lamenting how much the poor have to pay, is that poor people don’t pay taxes.
If you look at the tax brackets, it certainly seems poorer Americans pay taxes. The lowest tax bracket starts takes 10% and that is only up to $9,950 for those filing single, and $19,900 for those married filing jointly.
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However, everyone is entitled to a standard tax deduction in 2021 of $12,550 for those filing single, and $25,100 for those filing joint. Earn anything below those amounts, and you pay zero in taxes.
In addition, there is the child tax credit which reduces most Americans taxes by $2,000 per child. Congress increased the child tax credit to $3,000 for 2021, but they’re sending that extra thousand dollars to you in the second half of 2021, so you won’t get to claim that extra amount on your 2021 taxes. If you had two kids, for example, you won’t pay any taxes until you earn $29,100 if you file jointly. Some Americans will additionally qualify for the Earned Income Credit that can make the amount that you can earn without paying any taxes even higher.
It’s All About Accounting
No matter how hard you think it is to earn a decent living in America, you know there is no way that 61% of Americans make around $30,000 or less. So, how is it that 61% of households are paying no taxes?
You see, if you count the stimulus checks taxpayers got in 2020 as a refundable tax credits, then anyone who paid less than about $4,000 in taxes actually paid $0 in taxes because they got $4000 back. That widens out your population of people substantially beyond those at the lower end of the economic spectrum. Indeed, when counted in this manner 61 percent of Americans paid no taxes in 2020.
Don’t worry (you probably weren’t worried). That number is set to decrease for 2021. Sure there will be some more “refundable tax credits,” aka stimulus checks, and the bigger child tax credit, but a lot of people who were unemployed, or underemployed during some, or all of 2020, got back into employment during the economic speed up of 2021. Those folks will end up earning too much money, even with stimulus check to not pay any taxes, even if they end up paying just a small amount.
About the Author
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or tax advice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own tax professional when making decisions regarding your tax situation.