I just finished paying my taxes, and like last year, I had to send in a check for both federal and state taxes. Part of the reason I owed taxes this year is because I have taxes withheld from my day job, but I pay estimated taxes and self employment taxes on my business income.
I pay enough estimated taxes to avoid any penalties or fees, but I don’t always cover 100% of my tax liability for the year. This usually isn’t a problem though because I don’t owe any fees or penalties and I make sure I keep enough cash in a high interest savings account to cover my tax bill.
Right after paying my tax bill I saw a link to a news story that caught my eye.
Half of US Households Pay No Federal Income Taxes
OK, almost half. The number is actually estimated at 47% (according to Tax Policy Center), but that is close enough in my book.
How can taxpayers avoid owing federal income tax? The main ways are having a low enough income to be exempt from federal income taxes, or qualifying for enough tax credits, deductions, and exemptions.
Not only do some people not pay federal income taxes, but due to the number of credits and exemptions, some people actually receive a tax rebate from the government.
40% of people profit from federal taxes
As if not paying federal income tax weren’t enough, many people actually make a profit from filing their taxes each year.
“The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment. – Yahoo News.”
Take this example (same source):
The (recent tax code) changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.
Here’s how they did it, according to Deloitte Tax:
The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.
With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.
The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.
Must be nice to get paid.
What are your thoughts on taxes?
I’ll share my thoughts on the tax system: I Hate Doing Taxes. I don’t mind paying taxes because I know they are necessary for society. My biggest complaint with the tax system isn’t having to pay, rather it is the complexity of the tax system and having to go through the filing process. There are thousands of laws, rules, loopholes, exceptions, and other rules that clutter the books and over-complicate what could be a relatively straight forward process. It is because of this complexity (and my small business situation) that I hired an accountant to do my taxes.
But changing the complexity of the tax system is not a job I am capable of doing, and eliminating the loopholes and vast number of rules would probably put hundreds of thousands of people out of work.
What are your thoughts on the number of households that don’t pay federal income taxes? The US tax system in general?