Growing Number of Taxpayers Owe No Taxes

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An increasing number of tax filers have no tax liability after their allowable credits and deductions, according to the Tax Foundation.

An increasing number of tax filers have no tax liability after their allowable credits and deductions, according to the Tax Foundation.

The Tax Foundation is a nonprofit policy research group that advocates for the simplification of the tax code.

By analyzing data provided by the IRS and estimates from the Congressional Budget Office, the Tax Foundation found that nearly 42.5 million taxpayers, 32%, paid a net of $0 to the IRS in 2004. That constitutes a 50% increase from the number of non-payers in 2000.

The increase is partly credited to an increase in the child tax credit from $500 to $1000. The introduction of the new 10% tax bracket has also contributed to the increase. Both measures were enacted in 2001 with the goal of helping the middle class with their tax burden.

Tax Foundation Executive Director Scott Hodge explains that middle class doesn't necessarily mean middle income. The public's notion of middle class is a married couple with children.

Hodge's analysis reveals that the majority of middle-class taxpayers, at least 57%, are single. Married couples make up the majority of taxpayers in the top 20%, not the middle.

The top group is easy to join. With more families having dual-incomes, upper-income status comes quickly. Many families find that two incomes are necessary to live in high cost-of-living areas of the country. But the tax code does not adjust for cost-of-living.

For example, a couple living in Milwaukee can afford a median standard of living if they have an AGI of $74,443 and no chldren. They fall in the top 20% of tax payers, with a tax liability of approximately 10.9% of their AGI.

To live the same life in New York City, they would need to make $162,974. This would put them in the top 3% of taxpayers with a liability of approximately 19.1% of their AGI.

With tax refunds up nearly 5% so far this year, taxpayers shouldn't necessarily dread tax season. There is a pretty good chance that they won't owe income taxes to the federal government.

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Martin Lukac