More than 79 million American households will pay zero federal income taxes for 2018, an increase thanks to the Trump tax cuts.
The Tax Policy Center says that changes in the law mean more than 45% of American tax filers will pay nothing in federal taxes this year.
This tax code quirk, usually the domain of corporations and the wealthy with access to offshore accounts, is available to average Americans, and it has absolutely nothing to do with tax dodging.
The recently passed Tax Cuts and Job Acts, colloquially known as the “Trump tax cuts,” is the reason why.
The Trump administration cuts are seen as a boon for the wealthy and corporate America, yet they also allow an extra 2.3 million ordinary taxpayers of the hook coming next April 15.
Previously, about 43% managed to avoid paying federal taxes on their income.
The way it works is the new, higher standard deductions, which doubled under the Trump law to $12,000 while eliminating personal exemptions.
Rich people will do better, of course, but for most in their respective tax brackets, many non-payers of federal income taxes are low and middle-income earners.
According to the Tax Policy Center, there are various reasons to account for the number of non-paying filers.
The U.S. tax code, for one, is progressive. Lower tax rates apply to lower portions of income, so if you don’t earn much, you don’t owe much and maybe nothing at all.
The annual income threshold mandating a tax return in the first place is $10,400.
Then the deduction kicks in for the next $12,000. If you are filing as a couple, that’s another $24,000 tax-free.
For filers with low incomes, federal income taxes thus are all but eliminated via the new, doubled standard deductions.
The earned income tax credit and the child tax credit offset some of the remaining tax burden.
That said, the Tax Policy Center states that income is the overriding factor determining your final tax bill.
According to the center, an astonishing 7% of filers making between $86,000 and $150,000 will owe zero federal taxes.
The Tax Policy Center believes that 44% to 45% of non-paying filers, depending on income bracket, will be the standard for years to come.
However, the 45% don’t get off scot-free without paying taxes at all.
The Tax Policy Center estimates that about 58% of those who don’t owe federal taxes still end up with payroll taxes, essentially Social Security and Medicare payments that apply to everyone.
None of this counts real estate taxes, state and local taxes and fees, and of course sales taxes.
About 1% of tax filers who make considerably more than $150,000 a year won’t owe anything either, thanks to generous new rules on certain kinds of investments.
The tax cuts also doubled the estate tax exemption to $11.2 million for couples and half that for single filers.
The Tax Cuts and Jobs Act of course greatly benefits those in the 1% elite and businesses in America. For instance, the business tax cuts are permanent while tax cuts for individuals expire in 2025 — unless Congress moves to make them permanent, which is already being discussed by the Trump White House and the GOP-led Congress.