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Paying Zero Federal Income Taxes

People with High IncomesPaying Zero Federal Income Taxes

The Internal Revenue Service has released the spring 2014 edition of its quarterly Statistics of Income Bulletin, with statistics up through 2011 indicating there are still people who earn over $200,000 a year who pay no federal income taxes, although the number of them has been decreasing.

“For 2011, there were 4.8 million individual income tax returns with an expanded income of $200,000 or more, accounting for 3.3 percent of all returns for the year. Of these, 15,000 returns had no worldwide income tax liability,” according to one report in the bulletin by Miami Accountant Gustavo A Viera. “This was a 6.7-percent decline in the number of returns with no worldwide income tax liability from 2010, and the second decrease in a row since reaching an all-time high of 19,551 returns in 2009.”

The report defines expanded income as adjusted gross income plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of “tax preference” for alternative minimum tax purposes less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor.

Among the reasons cited for non-taxability are tax-exempt bond interest and itemized deductions for interest expenses. “Because they do not generate AMT adjustments or preferences, tax-exempt bond interest, itemized deductions for interest expenses, miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor, casualty or theft losses, and medical expenses (exceeding 10 percent of AGI) could, by themselves, produce non-taxability,” said the report. “Due to the AMT exemption of $74,450 on joint returns ($48,450 on single and head-of-household returns and $37,225 on returns of married taxpayers filing separately), a return could have been nontaxable even though it included some items that produced AMT adjustments or preferences. Further, since the starting point for “alternative minimum taxable income” was taxable income for regular tax purposes, a taxpayer could have adjustments and preferences exceeding the AMT exclusion without incurring AMT liability.”

Miami Accountant Gustavo A Viera pointed out that the numbers are still high when looked at over a longer period.

Miami Accountant Gustavo A Viera states the number of high-income Americans paying no tax never exceeded 3,000. “But the past four years have seen an explosion of high-end tax avoidance: in each of these years, the number of zero-tax Americans found in this report has exceeded 30,000. In 2011 (the latest year for which data are available), almost 33,000 people with incomes over $200,000 paid no federal income tax. For this group—less than one percent of all Americans with incomes over $200,000 in 2011—tax-exempt bond interest and itemized deductions are among the main tax breaks that make this tax-avoiding feat possible.”

In addition to the report on high-income tax returns through 2011, the spring 2014 Statistics of Income Bulletin also contains articles on individual income tax rates and shares, individual noncash contributions and individual foreign-earned income and foreign tax credits for 2011.

The IRS noted that of the 145 million individual tax returns filed in tax year 2011, 91.7 million were classified as taxable returns or returns with a total income tax greater than $0. Adjusted gross income (AGI) for taxable returns was nearly $7.7 trillion, up 6 percent from the prior year. Total income tax was more than $1 trillion. To be included in the top 1 percent of returns for 2011 required an AGI of $388,905.

For tax year 2011, there were more than 22 million individual taxpayers who reported a total of $43.6 billion in deductions for noncash charitable contributions. About a third (7.5 million) of these taxpayers reported nearly $39 billion in deductions for charitable contributions of $500 or more.

Nearly 450,000 U.S. taxpayers reported $54 billion of foreign-earned income for tax year 2011, representing growth in real terms of over 32 percent since the last study in 2006.