Millions owe no taxes

Blitz is on at area tax services

Published: April 14, 2004

WASHINGTON -- About a third of Americans who file federal returns this tax season -- an estimated 44 million filers -- will owe no 2003 income taxes, according to the Tax Foundation.

Among them: 5.5 million to 6 million families who no longer owe income taxes because Congress agreed last year to President Bush's request to increase the child tax credit from $600 to $1,000.

"The child credit is a very powerful tool for reducing the tax liabilities of families with children," said Scott Hodge, the Tax Foundation's executive director. "Perhaps Washington has never developed a more powerful tool for knocking people off the tax rolls."

The Internal Revenue Service does not estimate how many filers owe no income taxes, but other experts agreed with the Tax Foundation's findings.

"Married couples with two kids don't pay any income taxes until they make about $42,000," said Robert S. McIntyre, director of Citizens for Tax Justice. "The income tax, especially for families with kids, is very light."

The combination of the child tax credit -- which applies to dependents under 17 -- and the earned income tax credit for moderate- to low-income families produces more than half of the households that owe no income taxes, according to the Washington-based Tax Policy Center.

Eugene Steuerle, co-director of the Tax Policy Center and author of the soon to be published "Contemporary U.S. Tax Policy" (Urban Institute Press), said a large percentage of elderly households also owe no income taxes as well as college- and high-school-age workers.

Single people whose wages totaled less than $4,750 last year or whose unearned income from interest and dividends was less than $750 are not even required to file a federal tax return.

Some small businesses also are not liable for income taxes this year because of more generous tax write-offs for equipment purchases, according to tax preparers.

"Small-business owners are taking advantage of the extra expensing rules and bonus depreciation," said Glenn Hirner, a certified public accountant and partner at Pinnacle Consulting Group LLC in Green Bay, Wis. "If you give yourself a loss, under certain circumstances you can carry back the excess loss and recoup some of the taxes you paid up to five years ago."

Robin Makar, a certified public accountant and partner at Oshkosh, Wis.-based Clifton Gunderson, agreed that small business clients are benefiting from federal deductions of up to $100,000 for equipment purchases under Section 179 of the tax code.

"Most definitely, my clients are paying less than they did," Makar said. For those who do owe Uncle Sam, a new report from the nonpartisan Congressional Budget Office shows the effective income tax rate for the average household dipped to 10.4 percent in 2001, even before most of the three rounds of the Bush administration's tax cuts took effect.

The study showed that tax filers at all income levels were benefiting from tax credits and deductions: The bottom 20 percent with pretax incomes averaging $14,900 were receiving refundable tax credits that gave back to them 5.6 percent of their income.

The second 20 percent with incomes averaging $34,200 had close to zero income tax liability with an average income tax bill equal to 0.3 percent.

Among the top 20 percent earning an average of $182,700, the average income tax paid was only 16.3 percent, even though the top federal income tax rate was 39.1 percent.

Even the top 1 percent earning an average of more than $1 million annually paid a tax rate of only 24 percent. However, all income groups are required to pay federal payroll taxes for Social Security and Medicare. Those payroll taxes place a proportionately higher burden on lower income groups, experts say.