In 2011, almost half of the households won’t pay any federal income tax. This chart strictly reflects federal income tax; it excludes states taxes and payroll taxes, including social security taxes [1]. In addition, it’s people legally paying zero income tax, not those who aren’t reporting all their income [2].
Let’s take a look at what’s going on and see if we can’t learn something about reducing our own tax liability.
Large Incomes Paying Zero Tax
We know that many households don’t make enough money to pay tax, but let’s take a look at the top 10% of earners. There’s a table showing how many aren’t paying tax by income level [3]. Check out some of the numbers:
Income levels of the top 10% and number of filers paying zero tax:
- $163,173 – $210,997: 57,000
- $210,998 – $532,612: 78,000
- $532,613+: 27,000
That’s 162,000 households paying zero tax… on large incomes. Obviously there’s some substantial tax planning going on there, let’s dig a little deeper…
Which Tax Credits Do They Use?
A supplemental Tax Policy Center paper [4] that explains in depth who doesn’t have to pay tax and which tax credits (if any) they are using to bring them into the zero tax category can help us all with some tax planning.
In lower income tax brackets [5], the credits utilized are for the elderly [6] or low income working families with children [7].
However, when you analyze the higher tax brackets, there is a significant shift to using the following tax reducers and eliminators:
- Reduced Rates on Capital Gains [8] and Dividends [9]
- Education credits [10]
- Itemized Deductions [11]
- Above the line deductions [12]
- Tax exempt interest [13]
Next Steps
I’m seriously considering taking up the challenge in 2012 to become one of the households with a zero tax bill. (It’s too late for 2011.) What do you think, do you want to attempt it with me?
Are you a zero tax bill household? If so, what strategies are you using?