Millions of workers bounce back and make enough money to pay Uncle Sam.
Some 72.5 million households, or 40% of households, will pay no federal income tax this year, up from 60% two years ago, according to new estimates from the Tax Policy Center.
In 2021, nearly 56% of households or 99 million households paid no federal income tax, up from 60% or 100 million households in 2020, according to the nonpartisan think tank in the report.
“For 2022, the standard deduction is worth $12,950 for individuals and $25,900 for married couples filing jointly. Individuals whose income is less than this amount do not owe federal income tax.”
Massive job losses at the start of the pandemic sent millions out of work and the temporary rules exempted much of the 2020 jobless benefits from income tax, said Howard Gleckman, senior researcher at the Tax Policy Center.
Meanwhile, there were waves of direct cash assistance that were all technically tax credits – two rounds of stimulus checks in 2020 and another in 2021, plus a temporarily enhanced child tax credit . These waves came and went.
The roughly 40% of households that shouldn’t pay federal income tax have returned to pre-pandemic levels, and are even slightly below the 42% to 43% range in recent pre-pandemic years, a noted Gleckman.
This reflects the labor market returning to its pre-pandemic state, “i.e. pretty tight, pretty strong,” Gleckman said. “A lot of people work, a lot of people pay income taxes.”
For 2022, the standard deduction is worth $12,950 for individuals and $25,900 for married couples filing jointly. Individuals earning less than this amount do not owe federal income tax, although it may still be a good idea to file a return to access credits, including the Earned Income Tax Credit and the Income Tax Credit. child tax, Gleckman said.
The uncertain economic outlook
September’s unemployment rate was 3.5%, the same as February 2020, and one of the lowest rates since the late 1960s.
Nearly half (49%) of voters surveyed said the economy would be an extremely important factor in their vote, according to a new Gallup poll. Inflation rates are hovering around four-decade highs and recession fears are also looming.
Republicans are on course to secure a majority in the House of Representatives, according to polls and betting markets, but the race for the US Senate could still be close.
In some respects, the new tax estimates reflect current economic conditions. But they don’t provide insight into other parts of the economy, like the rapidly rising costs of goods and services that will surely be on voters’ minds.
“These tax estimates reflect current economic conditions, but they don’t provide insight into other areas of the economy, such as the rapidly rising costs of goods and services that will surely be on the minds of voters.”
For clues as to how the tax code deals with inflation, economists recommend looking at 2023 tax bracket increases, the standard deduction, and the amount of money people put in tax accounts. retirement savings like 401(k)s and IRAs.
There will be an increase of approximately 7% in the amount of the standard deduction and the income brackets of the tax bracket. With 401(k)s, the maximum savings amount increases by almost 10% and with IRAs, the increase is more than 8%.
The Tax Policy Center numbers focus on how many people pay federal income taxes, but that’s different from another hot topic known as the “tax gap.”
The IRS said last week that the gap – the difference between taxes owed and taxes paid – reached $496 billion a year between 2014 and 2016, although other estimates are much higher. Last year, Treasury Department officials in the Biden administration projected the annual gap at $600 billion.
The Center for Tax Policy’s numbers focus on who does and doesn’t owe federal taxes. In most cases, those who owe no federal income tax are low-income households, Gleckman said. “It’s not a bug, it’s a feature of the system,” he said.
In addition, some 30 million households, or 16.5%, will also not pay income tax. Where payroll taxes this year, up from 20% in 2020. Gleckman said a “significant” number of people in this category are seniors.
(Less than half of Social Security recipients pay taxes for their benefits, the Social Security Administration noted.)
Fewer than 1% of households or higher on the income scale — households earning more than $190,000 a year — will owe no federal income tax this year, according to estimates.
It’s likely the result of large itemized deductions or business losses that reduce taxable income, Gleckman noted.
However, the nation’s top 1% of taxpayers are responsible for more than a quarter of the tax gap by not paying or reporting all of their income, Treasury Department officials said.
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