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Who Pays No Tax At All?

I’m not talking about the crazy stories you hear of million dollar earners who somehow use the tax code to their advantage. I mean the regular working couple with their 2.1 children. Ok, I’ll round down to the nearest whole kid, we’ll assume 2.

Gross Income $56,631
401(k) (6%) $3,398
DCA $5,000
FSA $2,000
STD Deduction $11,900
4 exemptions $15,200
Tot Deductions $37,498
Net Taxable $19,133
Est Tax $2,000
Child Tax Credit $2,000
Total Tax $0

So now let’s dig in to the numbers and see how this family gets from a gross $56,631 to no tax due. First, I hesitated to declare any 401(k) at all, but since not all employers offer a Roth 401(k), and most offer some kind of match, it would be silly to walk away from a full match for fear of future taxes due. So I chose 6% as that’s the common number employers seem to match.

Next, the dependent care account pays for $5000 worth of child care needs and comes right off the top, as does the flexible spending account. Each company plan can set their own limit, so I chose an amount that seemed reasonable. Since this covers copayments, glasses, prescription medicine, we find that we spend more than this and we have only one child.

The standard deduction for a married couple filing joint is $11,900. Is it possible to itemize at this income level? Well, a $150,000 mortgage at 5% can put you right at $7,500/yr early on, but that’s a lot of debt for this income, so I’m just going to keep it simple and take the standard deduction. Each family member get a $3,800 exemption, $15,200 for this family of four.

Now we are coming down to the wire. After all these deductions, the ‘net taxable’ would be $19,133. The tax on $19,133 would be $2000 (see Fairmark for this, I am not affiliated with them, but they are nice folk there and have the easiest site to view this data. Also note, this is using the 2012 tax tables, income this year filing in 2013) but thanks to the Child Tax Credit of $2,000, this couple is at zero.

With the median family income around the $50,000 level, it’s easy to see how many are able to avoid the federal tax completely.

Joe

EDIT – When this article was first published, it contained the 2011 numbers, I’ve updated to reflect the 2012 tax rates. It’s now September ’12 and the presidential debate is getting ugly. The Republican candidate Mitt Romney has stated his disdain for the 47% percent who pay no federal tax. Me? I think if a couple has both people working, a $2000 child tax credit and deductions for their health or child related spending is a public good. Far more good than giving folk a tax break on the interest on their vacation homes.

  • AniVee March 26, 2011, 4:51 pm

    Great post!

    But I have a question about a very different situation: I have a friend (really, this is NOT ME) who insists she “doesn’t have to file a tax return”. She is 63, single, no dependents, retired, all income comes from Soc. Security (she took early SS, which I think was lunacy) plus a very nice pension and health coverage from a Fortune 500 company where she worked 35 years. She lives in PA, which does not tax pensions.

    She lives very comfortably, her only debt being a small mortgage payment.
    From what little I could understand at the irs.gov website if you have income over $9,000+ you have to file a tax return. She definitely has lots more coming in annually than that amount.

    I suspect my friend has confused “you won’t OWE any Federal or State taxes” or “you won’t have to do a State Tax Return in Pennsylvania” with “not having to file” – but I am not at all sure… my own tax situation being much more complicated, and totally different as I am not a USA resident.

    I am very afraid my friend will someday get hit with an enormous fine and interest and penalties that will ruin her financial stability, or that she will be hauled off to the Martha Stewart Memorial Cell at Womens Fed. Prison in Danbury, but she blithely insists her former tax preparer told her this. She is not financially savvy at all and has no investments or tax shelters, etc.

    Can you shed some light on this subject?

  • Doable Finance March 26, 2011, 7:09 pm

    There don’t seem to be loopholes just straightforward subsidizing by the government in this scenario. As long as folks – rich and not so rich – don’t look for loopholes or use some obscure kinds, then I guess it’s okay.

  • JOE March 26, 2011, 7:13 pm

    Indeed, this is straightforward. Of course, one needs to know about the credits, easy to miss for those doing taxes by hand on their own.

  • Holly March 27, 2011, 8:10 am

    Yes, this is all legit. Not all employees receive these benefits (i.e. part-timers) and when my children were young I stayed home w.them, so no childcare expenses…Also, when they did start going to pre-school (just a few hours/3 days a week), we weren’t aware that we could sign up for the pre-tax plan.

    And $2000 medical expenses seems a reach (outside of a sickness/severe illness or orthodontia, dental expenses, etc.), so that’s pushing it.

    That said, we are older and wiser now, so we know how to limit our tax burden. Of course almost everyone still pays tax for their future SS/Med. entitlements, right?

    Did you read about how GE paid ZERO Fed. taxes due to loopholes…now there’e some sorely missed $$ for the U.S.

    I am a bit more sympathetic toward the family grossing $55,000…

  • JOE March 27, 2011, 2:50 pm

    Actually, for my family, we use more than $2K in FSA. Our dental plan isn’t great and we are out of pocket for anything above “customary and reasonable.” One root canal or crown and we’re out a grand. My chiropractor isn’t covered, and while that’s another story, it’s 26 visits a year to help keep me vertical.

  • JOE April 11, 2011, 10:52 pm

    Sorry for the delay.
    From the instructions for the 1040:
    Chart A—For Most People
    IF your filing status is Single AND at the end of 2010 you were under 65
    THEN file a return if your gross income was at least $9,350.
    So with a ‘nice’ pension, she surely has to file. Why does she think she doesn’t have to?

  • TaxTip August 13, 2012, 7:59 pm

    Yes you’re correct, they pay no federal taxes, but they pay out $3149.59 in payroll taxes in 2011 & that’s with the 2% payroll tax break available for 2011 & 2012!
    They also fund their 401(k) which actually funds Wall Street & make the rich richer.

  • JOE August 13, 2012, 8:14 pm

    Agreed, this article wasn’t about Social Security or State taxes. On the other hand, the 50K earner gets a far higher return on their money than the $100K earner. Payroll tax is a fixed percent, but the payout diminishes for higher income earners.

  • Linda Velandra September 19, 2012, 7:49 pm

    Regarding the person social security for most people soc sec is not taxable, so if her pension is under $9350 and she has no other income then she probably does not have to file. This is part of the population that does not have to file or pay any taxes. Also I think you are mixing up child care credit and child tax credit. You can not get a child care credit and dependent care deduction both. However you can get a child tax credit of $1000 for each child under 17 , unless your income is above certain upper income amounts!

  • JOE September 19, 2012, 7:55 pm

    Very sloppy on my part, yes, child tax credit, just edited to fix this, much thanks!

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