No federal taxes taken out of paycheck

More than half of American households paid no federal income tax last year due to Covid-relief funds, tax credits and stimulus, according to a new report.

The nonpartisan Tax Policy Center estimates that 57% of U.S. households paid no federal income taxes for 2021, up substantially from the 44% before the pandemic.

Howard Gleckman, senior fellow at the Tax Policy Center, said Covid-related job losses, a decline in incomes, stimulus checks and tax credits were largely responsible for the increase.

The expanded child tax credit was a large factor. It substantially reduced "the income tax liability of more than a hundred million households and temporarily turned many from payers of small amounts of federal income tax to non-payers," Gleckman wrote.

With many of the tax programs ending, Gleckman forecasts the number of nonpayers will decline to 42% in 2022 and 38% by 2029.

"We predict it will go back down and remain fairly low relative to historical standards," Gleckman said.

Not just income taxes

Federal income taxes are just a part of the overall tax burden. Since most workers pay payroll taxes, the share of American taxpayers who pay neither payroll nor federal income taxes was only 19% in 2021, slightly higher than the 17% rate before the pandemic. Taxpayers also often pay state and local taxes.

Yet many conservatives and Republican politicians have seized on the soaring number of nonpayers to call for tax reform. Sen. Rick Scott as part of an 11-point "Rescue America" plan, said, "all Americans should pay some income tax to have skin in the game."

In an interview with NPR, Scott, R-Fla., denied he wanted to raise taxes on lower earners. "I don't believe in tax increases," he said.

"I'm not going to raise anybody's taxes, but I want to have the conversation," he said. "We've got able-bodied Americans who are living off of government programs instead of working, and that's caused by these Democrat policies. And that doesn't work. We got billionaires that are not paying, you know, income taxes."

The Tax Policy Center estimated that a plan calling for all Americans to pay at least $100 in income taxes would raise $100 billion in revenue in 2022. Yet such a plan, by nature, would be highly regressive: More than 80% of the tax increase would be paid by households making about $54,000 or less, and 97% would be paid by those making less than about $100,000.

Gleckman said Scott's claims about not supporting tax increases while wanting more Americans to pay taxes are "just silly."

"If you have people paying no tax and you want them to pay more taxes than they're paying now, I don't understand what Scott is saying. The reason people don't pay federal income tax is that they don't make enough money," he said.

There are wealthy taxpayers who pay no federal income tax in a given year, as documented in recent ProPublica articles, and they are likely a small share of nonpayers, Gleckman added.

"The tax code is actually quite progressive," Gleckman said. "There may be some cases where someone with a lot of wealth has little income, or they realize gains and offset those with losses or a charitable deduction. But that's unusual."

@cyates2021 wrote:
Late last year, I followed the W4 instructions, entered that both my spouse and I have jobs, that we have 2 dependent children, and arrived at $4,000 for dependents ($2,000 per dependent). After realizing my employer had not withheld any federal taxes all year, I inquired and they said that because my dependent amount is set to $4,000, no federal taxes have come out". Why would this happen? My spouse entered the same info. on her W4 and she had taxes withheld each pay period.

First, it might be correct to have no tax withheld, depending on your overall income. We can't tell without more information.

Second, you should generally not file the same W-4 as your spouse. You and your spouse need to follow all the W-4 instructions and worksheets for married with more than one job, not just the front page.

https://www.irs.gov/pub/irs-pdf/fw4.pdf

Generally, you only list your children on the job with highest income, look carefully at step 3 of the form, also make sure you either use the online calculator or check the box for "married with 2 jobs" in step 2.

You will want to prepare new W-4s for all your jobs, following the instructions or use the IRS online calculator. You may owe tax for 2021 if you claimed the same two dependents on both W-4s.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*