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The COVID-19 pandemic and the policy response to it resulted in an exceptional increase in the number of American households that did not owe federal income tax in 2020. The Tax Policy Center estimates that last year more than 107 million households, or nearly 61 percent, owed no income tax or even received tax credits from the government.
However, the increase is likely to be temporary. The proportion of non-payers will fall to around 102 million or 57 percent this year. And TPC predicts that the percentage will return to pre-pandemic levels in 2022 and continue to decline thereafter, provided the economy continues to recover and several temporary tax breaks expire as planned.
Last year, the proportion of non-payers rose by around 40 percent from the year before the 2019 pandemic, due to a combination of a weak economy and multiple rounds of tax-based support for needy households.
Loss of jobs, government payments
Twenty million workers lost their jobs. Many were low-wage workers who paid very little income tax before the pandemic broke out. In addition, the federal government responded to the economic downturn by distributing three rounds of economic impact payments (stimulus checks) from April 2020. Since they were designed as refundable tax credits, they had a significant tax-reducing effect in both 2020 and 2021. And the payments have led some households to pay income tax in order not to do so.
In 2021, Congress also significantly increased the scope and scope of the Child Tax Credit (CTC) as well as the Earned Income Tax Credit (EITC) and the Child and Dependent Care Tax Credit CDCTC. All of these are refundable credits that may have eliminated federal income tax obligations, or even enabled them to receive credits in excess of their tax liability, for millions of families.
In fact, no households earning less than about $ 28,000 will pay federal income tax this year, nor will three-quarters of those earning between $ 28,000 and $ 55,000. About 43 percent of middle-income households do not pay federal income tax.
More payers in the years to come
Remember, this only reflects those who don’t pay federal income tax. TPC estimates that although the number of households that pay neither wage nor income tax has increased significantly, around 4 out of 5 households pay one of these two taxes. And almost everyone paid different taxes, including state and local sales taxes, consumption taxes, property taxes, or state income taxes.
As more Americans get vaccinated, they get back to work quickly and many low-wage workers receive pay increases that put them back on federal income tax records. TPC estimates the number of households not paying federal income tax will decrease to about 75 million, or a little less than 42 percent, over the next year. According to current law, the proportion of non-payers will drop to around 40 percent by 2026.
Middle-income households are much more likely to pay again: Only around 21 percent will be non-payers next year; in 2026 it will be around 18 percent if the tax law returns to its pre-2018 level as planned.
The increases in repayable credits resolved last year will expire at the end of this year. And the individual income tax cuts contained in the Tax Reduction and Employment Act 2017 will end in 2025. However, it is unclear whether both will happen. President Biden and the Democrats in Congress are keen to extend the extended credit. And few lawmakers want to allow the TCJA tax cuts for low- and middle-income households to die.
Noticeable, but temporary
The importance of refundable credits becomes clear when you look at families with children. For example, this year 70 percent of all of these families and 84 percent of unmarried individuals with dependents (who submit as heads of household) will not pay federal income tax. But those proportions will drop to 48 percent and 67 percent next year, provided the expanded benefits expire as planned.
Keep in mind that many of those who moved from paying some federal income taxes to not paying may have experienced a relatively minor tax cut. Imagine someone who would have owed $ 1,500 in income tax in 2020 until they received two incentive payments – $ 1,200 in April and $ 600 in December. That put them in the non-payers category. While the payments resulted in a large percentage increase in their after-tax income, the dollar amount of their tax cut was only a tiny fraction of a high-income applicant who received a tax cut of, say, $ 30,000 from the 2017 TCJA owed some tax.
The number of households that did not pay income tax last year was really impressive. But remember: it was only temporary.
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