By midnight Thursday, about 150 million Americans will have buckled down and filed their annual federal income tax returns, and the IRS will begin collecting nearly $1 trillion in revenue from these individuals.
While you struggle to meet your deadline, consider that although the law requires you to file a tax return, more than 70 million of your fellow filers will not owe a single penny to Uncle Sam. As the latest news from the non-partisan Tax Policy Center shows, a record 47 percent of tax filers will have no federal income tax liability this year.
You may wonder, how is this possible? And, more importantly, how can I join this group?
There are many legal ways to reduce your income tax liability to zero. Of course, there are many illegal ways as well, but there's no sense in breaking the law. Not filing a tax return can get you into big trouble. Two years ago, the actor Wesley Snipes was sentenced to three years in jail and required to pay up to $17 million in back taxes plus penalties and interest because he didn't file his tax return for three years.
Also, don't try to argue that you don't have to file a tax return because the 16th Amendment that allows Congress to levy an income tax was never ratified, that you are a stateless person, or that filing a tax return is voluntary and you don't feel like doing it. The courts have thrown out these and other similar arguments.
The best way to pay no income taxes is -- no surprise -- to not have much income. According to the Tax Policy Center, 99.8 percent of filers with less than $10,000 cash income and about 80 percent of those with less than $30,000 cash income don't pay federal income taxes. (For a discussion of these results on Fox News by Roberton Williams of the Tax Policy Center, click here, or here.)
Of course, you don't have to be poor to not pay federal income taxes.
A not-insignificant number of the well off -- some 6,000 millionaires and about 119,000 of those with cash income above $200,000 -- will not pay any federal income tax in 2009. These people manage to get their federal tax liability down to zero (or lower), even though Congress passed a provision in 1969 called the Alternative Minimum Tax, or AMT, that is supposed to make sure that the highest earners pay something to the federal government.
While it may seem outrageous that all these people aren't paying any income tax, that outcome is exactly what policy makers expect to happen. In addition to the standard deduction, personal exemption, and the usual tax breaks, since the early 1990s, lawmakers have used the tax code to channel money to targeted groups or to help the middle class. The tax code also helps the well-off by taxing dividends, capital gains and private equity at favorable rates and allowing deductions for things like charitable contributions that tend to provide a relatively greater benefit to those in the higher-income groups than those in the lower-income groups. The share of taxpayers with no tax liability more than doubled between 1950 and 1990. (In 1950, just 21 percent of taxpayers had no income tax liability. Click here for a chart.)
This growth is due largely to two major developments. First, President Clinton expanded the refundable earned income tax credit in 1993 and added a $500 per-child tax credit in 1997. Second, income taxes were cut and the child tax credit was doubled and made partially refundable under President George W. Bush. As the non-partisan Tax Foundation explains, whereas a low-income person might have had to go to a welfare office to claim benefits 30 years ago, now the person receives the benefit in the form of reduced taxes that he or she can use to purchase services that used to be provided through direct spending. Lawmakers like this practice because they can present the benefit as a tax reduction rather than as a spending increase. As the Tax Foundation noted, "As the number of refundable tax credits continues to grow, more and more tax filers are seeing the IRS as a source of income, not something to which taxes are paid."
Last year, lawmakers added or expanded numerous tax benefits through the American Recovery and Reinvestment Act to help stimulate the American economy. These breaks, many of which are available only to people below certain income thresholds, include the home buyer credit, the Making Work Pay credit, the earned income tax credit, the American Opportunity Tax credit, the deduction for student loans, the "cash for clunkers" credit, and tax breaks for installing energy-efficient appliances or buying certain types of electricity-powered cars. (Taxpayers can check whether they are eligible for these credits and deductions by going to IRS.gov/recovery.)
Other tax refunds and deductions:
Working People and the Unemployed
If you have a job and don't make more than $75,000, you received a $400 refundable tax credit under the Making Work Pay provision. The credit starts to phase out after a person earns $75,000 (and married couples making $150,000) so that individuals who earned more than $95,000 (and married couples making more than $190,000) may not claim the credit.
If you don't' have a job and are receiving unemployment benefits, as was the case for 20 million Americans last year, you don't have to pay tax on your first $2,400 in unemployment benefits this year (normally, unemployment benefits are fully taxable). Plus, if you were laid-off, the government will pay for the first 65 percent of your COBRA health insurance costs for 15 months.
If you are a homeowner, you can take a tax deduction for your mortgage interest payments. If you bought a home or will buy a home anytime from last year through April 30 this year, you are eligible for up to an $8,000 tax credit if it was the first time you bought a home and a $6,500 credit if you were a long-term resident who decided to buy a new home. Also, whereas those who bought homes in 2008 have to pay back their home buyer credit, you won't have to pay back your credit. (For details on the housing credits, click here for the IRS website.)
As part of the Recovery Act, the government passed all sorts of incentives for individuals to invest in energy-efficient products, including a Residential Energy Property Credit that gives up to a $1,500 tax credit for doing things such as adding insulation or installing energy-efficient exterior windows and energy-efficient heating and air conditioning systems to existing homes. Homeowners can also get a Residential Energy Efficient Property Credit for installing equipment powered by renewable sources, such as solar. Individuals who like to drive small electric powered cars may be eligible for up to $7,500. (For more on energy tax incentives, click on the IRS website here.)
The tax code gives lots of breaks to college students. Students may take a tax credit for up to $2,500 toward tuition and related expenses paid in 2009 and 2010. Parents get a big tax break for their college expenses through the college tuition plans known as 529 plans (the tax break is available under section 529 of the tax code). Certain student loan expenses may also be deductible. (For more on education tax breaks, click here)
Finally, taxpayers who lost money on their investments can use those capital losses to wipe out up to $3,000 of taxes due on their capital gains. And, if capital gains aren't high enough to absorb the losses, they may use those loses to deduct up to $3,000 from their wages and other ordinary income.
Many view these tax breaks as beneficial to the economy. After all, Congress passed them largely as a way to help pull the American economy out of the recession that began in December 2007. And, as much as Americans complain about how these tax breaks make the tax code increasingly complex, they dearly love certain tax breaks. Along with the deduction for charitable contributions, the mortgage interest deduction is one of the most sacred cows in the tax code.
Other groups view these tax breaks rather negatively. For example, the Tea Party movement, which more than a quarter of Americans support, originated in opposition to the economic recovery act. But, since 19 percent of Tea Party members earn less than $30,000 a year, quite a large number of them may also be members of the group that pays no federal income tax.
But whether rich or poor, Republican or Democrat, Tea Party member or not, the tax code is there to help you minimize the amount of taxes you pay to the federal government. What's not to like about that? Here's to a happy Tax Day on April 15.
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