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TaxWatch: 40% of households will pay no federal income tax this year. Why that’s good news.

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Millions of workers are bouncing back — and making enough money to pay Uncle Sam.

Some 72.5 million households or 40% of households will pay no federal income tax this year, down from the pandemic high of 60% two years ago, according to estimates from the Tax Policy Center.

In 2021, nearly 56% of households or 99 million households paid no federal income tax, down from 60% or 100 million households in 2020, the nonpartisan think tank’s said in the report.

“For 2022, the standard deduction is worth $12,950 for individuals and $25,900 for married couples filing jointly. People earning below that amount do not owe federal income taxes.”

Massive job losses in the pandemic’s early stages sent millions of people to unemployment lines and temporary rules exempted much of 2020 jobless benefits from income taxes, Howard Gleckman, senior fellow at Tax Policy Center, said.

Meanwhile, there were waves of direct cash assistance that were all technically tax credits — two round of stimulus checks in 2020 and another round in 2021, plus a temporarily enhanced child tax credit. Those waves came and went.

The approximate 40% of households projected to pay no federal income tax is back to pre-pandemic levels, and is even slightly smaller than the 42% to 43% range during recent pre-pandemic years, Gleckman noted.

It reflects the labor market’s return to its pre-pandemic status, “which is to say pretty tight, pretty strong,” Gleckman said. “Lots of people are working, lots of people are paying income tax.”

For 2022, the standard deduction is worth $12,950 for individuals and $25,900 for married couples filing jointly. People earning below that amount do not owe federal income taxes, even if it may still be a good idea to file a return to access credits including the earned income tax credit and the child tax credit, Gleckman said.

The uncertain economic outlook

September’s jobless rate was 3.5%, the same as February 2020, and one of the lowest rates since the late 1960s.

Nearly half (49%) of surveyed voters said the economy would be an extremely important factor in their vote, according to a new Gallup poll. Inflation rates are sticking around four decade highs and recession worries are also looming.

Republicans are poised to gain the majority in the House of Representative in the midterm elections on Nov. 8, polls and betting markets are indicating, but the race for the U.S. Senate could still be a close call.

In some ways, the new tax estimates reflect current economic conditions. But they don’t give insight into other parts of the economy, like the fast-rising costs of goods and services that will surely be on voters’ minds.

“These tax estimates reflect current economic conditions, but they don’t give insight into other areas of the economy, like the fast-rising costs of goods and services that will surely be on voters’ minds.”

For clues on how the tax code is addressing inflation, economists recommend looking at increases in the 2023 tax brackets, the standard deduction and the amount of money people put in retirement savings accounts like 401(k)s and IRAs.

There will be an approximate 7% increase in the size of the standard deduction and the tax bracket’s income ranges. With 401(k)s, the maximum savings amount is rising nearly 10% and with IRAs, the increase is more than 8%.

The Tax Policy Center’s numbers are focused on the number of people paying federal income taxes, but that’s different than another hot-button topic known as the “tax gap.”

The IRS last week said the gap — the difference between taxes owed and taxes paid — grew to an annual $496 billion in the 2014-2016 span, though other estimates go far higher. Last year, officials in the Biden administration’s Treasury Department projected the yearly gap at $600 billion.

The Tax Policy Center numbers focus on people who do or do not owe federal taxes. In most cases, those who do not owe federal income tax are low-income households, Gleckman said. “This is not a bug, this a feature of the system,” he said.

What’s more, some 30 million households, 16.5%, will not pay either income taxes or payroll taxes this year, down from 20% in 2020. Gleckman said a “significant” number of people in this category are senior citizens.

(Less than half of Social Security recipients pay taxes for their benefits, the Social Security Administration has noted.)

Fewer than 1% of households or higher along the income scale — households earning over $190,000 a year — will owe no federal income tax this year, the estimates said.

That’s likely the result of large itemized deductions or business losses that are shrinking taxable income, Gleckman noted.

The country’s top 1% of taxpayers, however, are responsible for more than a quarter of the tax gap by not paying or not reporting the full extent of their income, Treasury Department officials have said.  

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