According to a recent congressional survey, a large percentage of American households could not pay any income taxes in 2021.
When taxpayers with income under $75,000 file their 2021 returns next spring, they are expected to have no tax liability after deductions and credits. According to new estimates from the Nonpartisan Joint Committee on Taxation, they will also receive money from the IRS.
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The average income tax rate for taxpayers earning $75,000 to $100,000 is estimated to be just 1.8 percent this year.
ESTIMATED DISTRIBUTION OF 2021 INCOME TAXES
| INDIVIDUAL INCOME | PROJECTED AVERAGE INCOME TAX RATE, 2021 |
| UNDER $75,000 | <0% |
| $75,000-$100,000 | 1.80% |
| $100,000-$200,000 | 5.70% |
| $200,000-$500,000 | 13% |
| $500,000-$1 MIL | 20.80% |
| OVER $1 MIL | 25.80% |
“The main drivers for nonpayers are the [earned income tax credit] for lower earners and the child tax credit for families with children after accounting for the standard deduction,” said by one expert.
Although paying no taxes is not a new phenomenon, it could be more prevalent this year as a result of a number of temporary tax code adjustments, said by one expert.
Several tax credits were extended in addition to the $1,400 stimulus checks per adult and dependent approved in the American Rescue Plan. The earned income tax credit and the child tax credit are two of them (see details below). Both credits are considered important because they are refundable, which means you can have some or all of them refunded even though your tax bill is zero.
The estimates by Congress do not mean that anyone making less than $75,000 would pay no taxes.
“There are plenty of people in that income group that will owe income taxes,” said by expert. “Those are the averages for everyone.”
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Furthermore, owing no taxes to the IRS on your earnings does not imply that you will pay no federal taxes.
If you make money from a job (rather than, say, investments), you must pay Social Security and Medicare taxes. Payroll taxes amount to 7.65%, which the employer deducts from the paycheck (and contributes the same sum — 7.65% — to such services on your behalf).
If you work for yourself, you are responsible for all shares, or 15.3 percent (although you can deduct half of that elsewhere on your tax return).
According to the most recent data from Statista, about 53% of Americans had an annual household income of less than $75,000 in 2019. According to the Federal Reserve Bank of St. Louis, the median household income in the United States that year was about $68,700.
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“The group not paying federal income taxes in any given year tend to be moderate income with children, as well as older people, who may not have earnings that they are paying tax on,” said by one expert.
The next step by President Joe Biden to reform individual taxes is expected to target higher-income families. This could take the form of raising the top marginal income tax rate from 37 percent to 39.6 percent, as well as changing the top capital gains tax rate from 20 percent to 39.6 percent.
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As for details of the credits: For 2021, the child tax credit will be improved in many ways, including increasing the per-child contribution to $3,000 from $2,000 for families with income below certain thresholds (phase-outs begin at $75,000 for adults, $112,500 for heads of household, and $150,000 for married couples), as well as an additional $600 for children under the age of six. For the first time, children under the age of 17 are also eligible.
Those child tax credits will be advanced via direct payments beginning in July.
The earned income tax credit for childless jobs has also been increased, with the maximum credit for that group increasing to $1,502 in 2021 from $543, according to Tax Foundation research. The advantage will be realised in spring 2022, when taxpayers file their 2021 returns.
The bill also increases the income level at which the earned income tax credit hits its limit (from $4,220 to $9,820) and extends the phaseout for individual tax filers to begin at $11,610 instead of $5,280. For this year, the minimum age to apply for the credit has been lowered to 19 instead of 24, and the maximum age of 65 has been removed.
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