And the number is actually lower than in 2020 and 2021.
I won't keep you in suspense. About 40% of American households will pay no federal income tax whatsoever in 2022, according to estimates from the Tax Policy Center. This works out to 72.5 million households that won't have any federal tax liability.
Believe it or not, this is actually lower than it has been in the past. In 2021, 99 million households, or 56% of the total, didn't pay any federal income tax. And in 2020 when the COVID-19 pandemic disrupted lives around the world, 60% of U.S. households didn't have to pay anything to the IRS.
Why do so many households not pay income tax?
During the 2020 and 2021 pandemic-plagued years, the spike in the number of households with no federal income liability can be attributed to a few things.
First, many people lost their jobs -- either permanently or temporarily -- when the pandemic started. There were programs that dramatically increased unemployment benefits, but also rules that exempted unemployment benefits from taxes. There was also the expanded Child Tax Credit, as well as three rounds of stimulus checks (which were technically tax credits).
While that explains the surge we saw in the past two years, what about 2022? The 40% figure is back to pre-pandemic levels -- in other words, it's quite normal for 40% (or slightly more) of households to pay no federal income tax.
There are a few big reasons:
- Every household is entitled to a rather large standard deduction, even if they don't have any deductible expenses like mortgage interest. For tax year 2022, the standard deduction is $12,950 for single taxpayers and $25,900 for married couples.
- There are several deductions that can be taken in addition to the standard deduction. These are informally known as above-the-line deductions and include things like retirement account contributions.
- There are plenty of available tax credits that will reduce your tax bill dollar for dollar. The Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit are just a few of the most common examples.
An example of a middle-income family with no tax liability
It isn't just households with low income that end up paying no federal taxes. Consider this example:
Let's say that a married couple makes $100,000 per year. They have three children, ages 4, 7, and 10. The couple owns their home, but choose to use the standard deduction instead of deducting their mortgage interest and other allowable deductions.
- We'll start with their $100,000 income. Subtracting their standard deduction leaves $74,100.
- The couple contributes 10% of their salaries to 401(k) plans, or $10,000, which further lowers their taxable income to $64,100.
- The couple puts $3,000 into a health savings account (HSA) to plan for medical expenses, taking their taxable income to $61,110.
- According to the 2022 tax brackets, this taxable income should produce federal income tax of $6,922.
- The couple receives a $2,000 Child Tax Credit for each of their three children ($6,000 total), which lowers their tax to $922.
- The couple pays $6,000 in childcare expenses for the four-year-old and $3,000 in after-school care for their older children. This gives them a $1,200 tax credit (20% of a maximum of $6,000 in expenses), eliminating the rest of their tax liability.
Of course, this is a simplified example and a hypothetical family. But the point is that it doesn't exactly require any complex tax loopholes for many families to owe $0.
A progressive taxation system at work
To be perfectly clear, this is exactly what the federal income tax is designed to be -- a progressive system of taxation that collects little or no taxes from those on the lower end of the income spectrum, while collecting the bulk of its revenue from those at the top. And while the exact percentage will vary from year to year, it's perfectly normal for a large portion of the population to have federal income tax liability of $0.
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As a financial expert with a deep understanding of taxation systems and economic trends, I'll provide insights into the concepts discussed in the article about the decreasing number of American households paying federal income tax in 2022.
Firstly, the article highlights that about 40% of American households will pay no federal income tax in 2022, a decrease from the previous years. This is supported by estimates from the Tax Policy Center, a reputable source in tax analysis and policy evaluation. It's crucial to note that my expertise includes staying updated with reliable sources such as the Tax Policy Center to ensure accurate and current information.
The article attributes the spike in the number of households with no federal income tax liability in 2020 and 2021 to various factors related to the COVID-19 pandemic. During these years, job losses led to increased unemployment, and there were measures like enhanced unemployment benefits and exemptions on taxing unemployment benefits. Additionally, the expanded Child Tax Credit and stimulus checks (framed as tax credits) played a role in reducing tax liabilities.
In 2022, the number of households not paying federal income tax has returned to pre-pandemic levels. The article outlines three significant reasons for this:
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Standard Deduction: Every household is entitled to a substantial standard deduction, even if they don't have deductible expenses like mortgage interest. For 2022, the standard deduction is $12,950 for single taxpayers and $25,900 for married couples.
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Above-the-Line Deductions: Apart from the standard deduction, there are above-the-line deductions, such as contributions to retirement accounts, that further reduce taxable income.
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Tax Credits: Numerous tax credits, including the Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit, directly reduce the tax bill dollar for dollar.
The article provides a hypothetical example of a middle-income family with no tax liability to illustrate these concepts. This family, making $100,000 per year, benefits from standard deductions, above-the-line deductions, and tax credits, resulting in zero federal tax liability. This example emphasizes that it's not necessarily complex tax loopholes but rather standard provisions and credits that can lead to a $0 tax liability.
Lastly, the article touches on the progressive nature of the federal income tax system. It emphasizes that the system is designed to be progressive, collecting little to no taxes from lower-income individuals and households, while the bulk of revenue is generated from those with higher incomes.
In conclusion, the insights provided align with my expertise in financial matters, taxation systems, and economic policies. The article effectively breaks down complex concepts, making them accessible to a broader audience.
