money 61% of U.S. households paid no federal income tax last year
The majority of U.S. households paid no federal income taxes in 2020, a spike driven by the pandemic-induced economic downturn and multiple rounds of tax-based assistance. The trend is likely to continue in 2021.
Nearly 107 million households — or 61% of U.S. households — owed no federal income taxes in 2020, according to estimates by The Tax Policy Center, marking a 40% increase from 2019 when 43.6% of households didn’t pay taxes.
“Even though those numbers are very dramatic, they are only temporary,” Howard Gleckman, senior fellow at the Tax Policy Center, told Yahoo Money. “What happened was because of COVID and then because of the policy response to COVID. Many more people did not pay federal income tax in 2020.”
One reason for the drastic drop is the financial hardship many Americans experienced last year. More than 20 million workers lost their jobs in 2020 with low-income workers hit hardest. Many of the low-wage workers paid little income taxes before the pandemic, and the drop in income meant they owed even less money to the Internal Revenue Service.
The government response to the pandemic further contributed to the lower number of income tax payers.
The three rounds of stimulus checks — two of which were sent out in 2020 — were designed as a refundable tax credit, effectively reducing a household’s tax liability. The first $1,200 stimulus payment reached over 160 million people and the following rounds helped a similar number.
“It was obviously an important piece,” Gleckman said. “These were very significant tax credits to people and these were dollar-for-dollar reductions in the amount of tax people paid.”
‘A lot of this was for families with children’
The government response to the pandemic will continue to reduce the share of people paying income taxes in 2021, according to The Tax Policy Center, which estimates that 57% of households are expected to pay no federal income taxes this year.
The expansion of the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) — both refundable credits — will likely reduce or eliminate many households' liability for 2021.
“A lot of this was for families with children who benefited quite a lot from the expansion of those credits,” Gleckman said. “As you go up the economic income ladder, fewer and fewer people are non-payers.”
About 99.9% of households in the lowest quintile — those making below $28,000 — will effectively pay no federal income taxes in 2021. Around 75% of households in the second quintile — those families making between $28,000 and $55,000 — also won’t pay any taxes for the 2021 tax year.
‘These people did pay other taxes’
While those households paid no federal income taxes and potentially little to no state income taxes in 2020, the majority of U.S. households pay other taxes.
Nearly 80% of U.S. households paid either federal income taxes or payroll taxes in 2020, the report found. Additionally, many people are subject to state and local sales taxes, excise taxes, property taxes, or state income taxes.
“These people did pay other taxes,” Gleckman said. “If you worked at all, you pay payroll taxes, you almost certainly paid sales taxes.”
The spike in people not paying federal income taxes is only temporary, occurring only in 2020 and 2021, and then should return to normal levels, Gleckman said. In general, having an elevated share of people who don’t pay federal income taxes could lead to a public that’s less engaged in policy and how the government is working, according to Gleckman.
“If this were permanent and you had a situation where 60% of the public wasn't paying federal income tax, that has some very important effects not just economic, but societal effects,” he said. ”It means that they have a lot less stake in the game.”
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova
