Return-Free Filing: Who would qualify?
The size and scope of any return-free system in the United States would depend on its administrative and structural features. Depending on the extent of changes to the current tax structure and administration, a final tax return filing requirement could be eliminated for between approximately 8 million and 60 million taxpayers. Those taxpayers who derive all or most of their income from wages and do not itemize deductions are the most likely to qualify. The system could be expanded to include taxpayers with income from dividends, interest, pensions, Individual Retirement Account (IRA) distributions, and unemployment insurance benefits, and those taxpayers qualifying for the earned income tax credit (EITC). Taxpayers with relatively uncomplicated itemized deductions could also be brought into the system.
- Approximately 20 million taxpayers in 1999 had income solely from wages and salaries, claimed no credits (including the EITC), did not itemize deductions, and were in either the zero or the 15 percent tax bracket. Since almost all wage income is subject to withholding already, these taxpayers could more easily be shifted into a return-free system than the rest of the filing population.
- If withholding at source were extended to interest, dividends, pensions, IRA distributions, and unemployment insurance benefits, the number of eligible taxpayers would rise by 21.6 million. To some extent, taxes are already withheld on these forms of income. Mandatory withholding would expand the scope of a return-free system and could improve compliance but would place new administrative costs on taxpayers. To reduce these costs, relatively small payments and some payers (for example, individuals who hold debt such as seller-financed mortgages, and foreign banks and other foreign-resident debt holders) could be exempted from the withholding requirements.
- Administering the EITC under an exact withholding system would prove complex, but feasible. Under a tax agency reconciliation system, the EITC could continue to be administered through the tax system. An additional 13.5 million taxpayers would be eligible for a return-free system if the EITC were included.
- Certain deductions could be accommodated within a return-free system. The three most common itemized deductions in the United States are for state and local taxes, mortgage interest, and charitable contributions. Incorporating these into a return-free system would raise the number of eligible taxpayers by 1.7 million in the zero and 15 percent brackets and another 1.9 million in higher brackets. This is a small fraction of the current 33 million itemizers and reflects the fact that itemizers do not generally meet the other types of restrictions assumed for eligibility for nonfiling.