More than 40% of U.S. households will owe no federal income tax, down from last year, according to a new analysis

The Internal Revenue Services offices in Washington, D.C.
Adam Jeffery | CNBC

More than 72 million American households will pay no federal income taxes this year, marking a large decline from last year, according to a new analysis.

An estimated 72.5 million households — or 40% of total households — will pay no federal income taxes for tax year 2022, according to an analysis from the Tax Policy Center. The share marks a substantial decline from the 59.3% who paid no federal income taxes in 2020 and from the 56% in 2021. Both years were dominated by Covid-related shutdowns and restrictions.

The number of Americans who pay no federal income taxes remains a hot political issue, with many Republicans arguing that more Americans should pay federal income taxes and Democrats often arguing that many of the rich don’t pay taxes.

Yet the real drivers of so-called “non-payers” — or those who owe no federal income taxes — are tax credits and employment. During the pandemic, the number of non-payers surged as unemployment rose along with tax credits and government payments.

Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute, said people are more likely to owe no federal income taxes when they’re unemployed or see dramatic reductions in income. The standard deduction, which effectively doubled after the Tax Cuts and Jobs Act, is now at $25,900 for married couples and $12,950 for single filers, so anyone earning less than those amounts wouldn’t owe federal income taxes.

Increases in the child tax credit and earned income tax credit also boosted the number of non-payers, along with government stimulus payments, which were also a form of tax credit.

“The two big reasons for the increase in 2020 and 2021 were the Tax Cuts and Jobs Act and Covid,” Gleckman said.

Now, with unemployment at or near record lows, and many of the credits and government payments ended, the number of Americans who owe some form of federal income tax in 2022 will rise closer to its historical norms of around 60%.

“People are back to work and all of those tax credits are long gone,” he said.

Despite the widespread claim that it’s the wealthy who pay no tax, the vast majority of Americans who pay no federal income tax are low- to middle-income earners.

Almost 60% of non-payers make less than $30,000 and another 28% make between $30,000 and about $60,000. Only about 0.6% of the top 20% of earners — or those making about $190,000 or more — will pay no federal income taxes this year.

About 24 million, or roughly one-third, of non-payers are age 65 or older, many of whom live on Social Security.

“For the most part, people don’t pay income tax because they have little income,” he said.

Gleckman added that virtually all Americans pay some form of tax, whether it’s sales and excise taxes, state taxes or property taxes.

The big question for 2023 and the number of non-payers is the economy. Gleckman said if unemployment rises and the economy falls into a deep recession, the number of federal non-payers could rise again. On the other hand, after 2025, when the individual provisions of the Tax Cuts and Jobs Act are set to expire, the number of non-payers could suddenly decline.

If those provisions are allowed to expire, Gleckman said the share of Americans paying no federal income tax could fall to 35% by 2032.

Earlier this year, Sen. Rick Scott, R-Fla., targeted the growing number of non-payers in his “Plan to Rescue America.”

“All Americans should pay some income tax to have skin in the game, even if a small amount,” he wrote. “Currently over half of Americans pay no income tax.”

Scott also said in an NPR interview: “We’ve got able-bodied Americans who are living off of government programs instead of working, and that’s caused by these Democrat policies. And that doesn’t work.”

Democrats like Sen. Elizabeth Warren of Massachusetts and Sen. Ron Wyden of Oregon often argue that the rich don’t pay their fair share, pointing to billionaires like Jeff Bezos and Elon Musk, who paid no federal income taxes in certain years.

Gleckman said that in the rare cases when high-earners pay no federal income taxes, it’s usually because of a one-time business loss or medical bill.

“For high income people who pay no federal tax, it’s usually just for one year,” he said.

Sophie Tremblay

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