Study Shows 57% of US Households Owed No Federal Income Tax in 2021

Mar 31, 2022 | Blog, Uncategorized

In 2021, more than 50 percent of American households paid zero income tax to the Internal Revenue Service. According to a Bay Area tax attorney, this spike, although temporary, was the result of major COVID-19 relief spending, which included stimulus payments for certain individuals, and tax credits for which various people qualified.

Interesting Statistics from the Tax Policy Center

The Urban-Brookings Tax Policy Center, a nonpartisan organization, estimated in a recent report that 57 percent of filers paid no taxes in 2021. Although this is a slightly lower percentage than the one from the prior year, which came in at an even 60 percent, it is still a considerable jump from the number on record before the start of the pandemic.

Howard Gleckman , a Tax Policy Center’s senior fellow, stated that the number of families who paid zero taxes last year was truly astonishing, but he also urged people to remember that such statistics are only temporary.

If you asked IRS tax attorneys, they would very likely tell you that the source of the increase is due to a surge in government spending, a direct result of the pandemic. The expanded child-tax credit, extended federal unemployment, and the series of three stimulus checks given to various taxpayers were all part of an overall pandemic relief strategy. However, these programs did not eliminate bills for back taxes that filers already owed from previous years.

Stimulus Checks Classified as Refundable Tax Credits

Due to stimulus checks being categorized as refundable tax credits, tax liability for both 2020 and 2021 was significantly reduced for many households. In certain cases, the stimulus checks alone changed the status of some filers, who ultimately ended up owing no taxes when they otherwise would have. There were virtually no households with an income of less than $28,000 annually who paid federal income tax last year. Seventy-five percent of households with an income of more than $28,000 but less than $55,000 per year did not pay taxes. Finally, approximately 43 percent of middle-income households did not owe taxes to the federal government.

Different Story for State and Payroll Income Taxes

Although many households got a significant tax break for the years 2020 and 2021, most still owed state income taxes or payroll taxes. The Tax Policy Center’s study indicated that approximately 80 percent of individuals were responsible for some kind of tax bill in at least one of these categories. Ultimately, for the years 2020 and 2021, virtually everyone paid the government in one form or another, such as state income taxes, property tax, excise taxes, or local tax on goods and services.

Households That Pay Zero Federal Income Tax Expected to Dip to 75 million in 2023

The number of households that owe zero federal income taxes is expected to plummet to just under 42 percent, or 75 million, in 2023. Under current law, it is also estimated that the number of filers who will not pay any federal income tax will drop to approximately 40 percent by 2026. However, middle-class filers will probably see a rise in their tax liability in future years, and nonpayers will make up only approximately 21 percent of that category. The new laws and ever-changing regulations can be difficult to understand, so for the most appropriate tax planning advice, it is best to contact a professional Bay Area tax attorney.