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The basic structure of the income tax simply exempts subsistence levels of income from tax.
What about the rest of the untaxed households, the 23 percent of households who don’t pay income tax because of particular tax breaks?
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While that’s the case for many households, a new TPC paper shows that about half of people who don’t owe income tax are off the rolls not because they take advantage of tax breaks but rather because they have low incomes.
For example, a couple with two children earning less than ,400 will pay no federal income tax this year because their ,600 standard deduction and four exemptions of ,700 each reduce their taxable income to zero.
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Those provisions include the exclusion of some Social Security benefits from taxable income, the tax credit and extra standard deduction for the elderly, and the child, earned income, and childcare tax credits that primarily help low-income workers with children (see graph).
Extending the example offered above, the couple could earn an additional ,375 without paying income tax because their pre-credit tax liability of ,056 would be wiped out by a ,000 child tax credit and of EITC.
Much has been made of TPC’s estimate that fully 46 percent of Americans will pay no federal individual income tax this year.
Commentators have often misinterpreted that percentage as indicating that nearly half of Americans pay taxes.