76 Million Families (and 7,000 Millionaires!) Don't Pay Federal Income Taxes

Nearly half of all taxpayers owed no federal income tax this year, according to new distribution analysis from the Tax Policy Center. Does that make you burn? Then have at this: 7,000 millionaires didn't owe any individual income taxes either. Seven thousand.

WHY DOES HALF THE COUNTRY PAY NO FEDERAL INCOME TAXES?

Remember, even families who owe no federal income taxes still pay tax to their local government, their state, the Social Security fund, and Medicare. Still, 76 million tax units owe no federal income tax. For the purposes of this article, let's call them the NOFITs (for No Federal Income Tax). Who are these NOFITs?

The poor, mostly. Consider households earning less than $30,000 a year. They make up 45% of all taxpayers, but fully 80% of NOFITs.

Here's what that statistic looks like, in two pie charts. The chart on the left shows all tax units.* The chart on the right shows the NOFITs. (Numbers refer to cash income, in thousands of dollars.)

Two takeaway stats. First, 79% of the non-income-tax-paying crowd, the NOFITs, makes less than $30,000. Second, 99% of the NOFITs make less than $75,000. Still, that leaves one percent. Nearly 500,000 tax units earn more than a $100,000 and pay no taxes. How is that possible?

WHY DO 7,000 MILLIONAIRES PAY NO FEDERAL INCOME TAXES?

There are 433,000 tax units (individuals or families) reporting cash income greater than $1 million. Seven thousand of those units, or 1.6% of all millionaires, owe no federal individual income tax.

They might not be lucky as they seem, said Roberton Williams of the Tax Policy Center. Many of the things that can bring taxable income down from $1 million to zero are considerable misfortunes, such as: investments that lose significant income, a destroyed home or business (known as a casualty loss), high medical expenses (especially for those who self-insure), or nursing home expenses.

"You can attribute some of those 7,000 non-tax payers to investment choices they made, like tax exempt bonds," Williams told me, "but a lot of this might be unfortunate happenstance. A tornado tore through your home, you got a very expensive form of cancer, you lost hundreds of thousands of dollars in an investment. Those aren't choices people made, they're just legal deductions under the law."

WHAT WE CAN DO ABOUT IT

In 1969, Treasury Secretary Joseph Barr announced that 155 households with incomes over $200,000 paid no income tax. Outrage spawned the birth of the Alternative Minimum Tax (AMT) to ensure that rich Americans paid their fair share.

Forty years later, 7,000 tax units earning more than $1 million don't pay federal taxes on their income. Yes, many of them might have befallen great personal and financial calamities. But as a matter of civics, is it healthy for so many Americans to contribute noting to the parts of the budget funded by individual income taxes, like defense, education, and infrastructure?

"We established the Alternative Minimum Tax to ensure that the rich pay taxes, like the rest of us," Williams said. "Today we have thousands of millionaires paying no taxes, and this is with the Alternative Minimum Tax in place. If these people are acting legally, then they have every right to lawfully reduce their tax burden. But we worry about all these people who are zeroed out. "