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The Tax Policy Center’s estimate means that some 76 million households won’t pay federal income tax in 2011. But they still owe other taxes. About two-thirds pay payroll taxes, and most pay state and local income and sales taxes as well as excise taxes on gas, tobacco, cigarettes and alcohol. Of the one third who don’t pay payroll taxes, more than half are elderly who no longer work, and just under half are families with incomes under $20,000. Only about 1 percent of the population pays neither income nor payroll taxes and earns more than $20,000 a year, according to the Tax Policy Center.
For 50 percent of those that don’t pay federal income taxes, standard deductions and personal exemptions are enough to counteract their taxable earnings. A couple with two children earning less than $26,400, for example, will pay no federal income tax in 2011 because their $11,600 standard deduction and four exemptions of $3,700 cuts their taxable income to nil.
22 percent are senior citizens who get a more generous standard deduction, can exclude some or all of their Social Security income and may have tax-exempt interest from mutual funds and municipal bonds. For those who itemize, charitable contributions and medical expense deductions also subtract from their tax liability.
15 percent are working families, many of them low-income, who qualify for one or all of the Earned Income tax credit, the Child tax credit, the Child and Dependent Care tax credit. The earned-income credit is fully refundable, and the Child credit is partially refundable this year, meaning some households may get refunds from the government even if they owe no income taxes.
The remaining 13 percent are a mix of mostly higher-income individuals with enough itemized deductions for items like mortgage interest, health payments, or charitable contributions, education tax credits, or tax exempt interest to zero out their income taxes.
“It’s wrong to rail on the 46 percent of people who don't pay income tax,” said Paul Caron, a tax professor at the University of Cincinnati College of Law. “A fairer analysis takes into account all taxes paid—and by this measure, everyone has tax skin in the game,” he said.
The 50% Of Americans Who Don't Pay Income Tax Will NEVER Be A Good Revenue Source - Business Insider