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.
|Child Tax Credit||$2,000|
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.
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.