Why Do Some Rich People Pay No Income Taxes? And How Much Does the Average American Actually Pay?
The explosive New York Times report that President Donald Trump didn't pay income taxes in 10 of the 15 years before winning the election has left Americans scratching their heads.
How could a self-proclaimed billionaire with such a wide-ranging empire pay only $750 in taxes his first year in the White House? How did he write off $70,000 for his hair?
The confusion is understandable. Though Trump's personal brand is built around his financial fortitude, his taxes have been a political hot button for years. He broke decades of precedent when he refused to release his tax returns as a candidate back in 2016. There are several ongoing legal disputes over his tax documents and business dealings.
For the record, Trump's camp has decried the piece as inaccurate. An attorney told the Times that "President Trump has paid tens of millions of dollars in personal taxes to the federal government." Meanwhile, Trump himself tweeted that the bombshell was "FAKE NEWS!" and that he "was entitled, like everyone else, to depreciation & tax credits."
If you're still bewildered, you're not alone. Here are five questions and answers that might help you understand the buzz around Trump's taxes — and how average Americans compare.
Why do some people pay no income taxes?
According to an oft-cited 2018 statistic from the Tax Policy Center, between 43% and 44% of Americans don't pay individual federal income taxes.
In general, people don't have to file tax returns — or pay federal income taxes — if their gross earnings are under a certain amount. That amount is called the standard deduction, and it fluctuates every year. For the 2019 tax year, if you were a single person under age 65 with no special circumstances and made less than $12,200, you were off the hook. (Note that we're speaking broadly and also only talking about individual federal income taxes. You still have to deal with state and possibly even local income taxes, if your municipality levies them.)
The 44% number represents a slight increase from previous years. It ticked up because of the Tax Cuts and Jobs Act of 2017, which not only expanded the standard deduction but also doubled the child tax credit.
About half of those non-payers are excluded thanks to "structural features of the income tax" based on their earnings and dependents, according to a 2011 paper from the Tax Policy Center. The other half don't pay because their tax liabilities have been wiped out by "special provisions of the tax code," like the ones for seniors and low-income working households with kids.
Why do some very rich people pay no income taxes?
Good question. Estimates of exactly how many millionaires are in this group vary widely — from 7,000 to 4,000 just for 2011 alone — but there are indeed some really rich people who don't pay federal income taxes.
Some of this can be attributed to unfortunate events. If you earn $1 million a year but your home gets destroyed, you make a bad investment or you contract an expensive disease, your taxable income could be seriously reduced, according to The Atlantic.
In addition, wealthy people can take advantage of deductions for charitable donations, tax-free interest from municipal bonds and foreign tax credits. Also, they tend to hire experts and CPAs whose entire job is to maximize tax breaks and discover loopholes — something a poor person might not have the budget to do.
As far as Trump in particular, there are complex tax rules around real estate. In some cases, developers can take deductions for their rental property losses, of which the president has a lot.
What expenses can you legitimately deduct from your taxes?
Ideas for tax write-offs abound online.
TurboTax points out that you can deduct sales tax, babysitting costs, expenses for charitable work, classroom materials. U.S. News and World Report mentions breaks for summer camp, textbooks and gas used while driving to meet clients. Policygenius brings up write-offs for solar panels, renters insurance for home offices, jury duty pay and even Olympic medals. Just make sure you keep your receipts. It's unclear whether Trump's $70,000 in hairstyling deductions would pass muster with the IRS. Hair care expenses should generally be avoided as deductions, "unless you can define very specifically how the expense applied to your business," reports Backstage, a publication for entertainment professionals.
On that note, Americans' 2020 taxes — the ones due in 2021 — are sure to be a doozy due to the pandemic. Millions of people have moved states, worked from home for months and gone on unemployment, all of which are sure to snarl the already complicated process of filing taxes.
How much does the average American pay in income taxes?
This is tricky to pinpoint. The data takes a couple of years to catch up, but here are a few figures to give you a rough idea.
In 2018, Americans filed 153.8 million individual tax returns for some $11.8 trillion in income. The effective tax rate was 12.3%.
According to the Bureau of Labor Statistics' Consumer Expenditure Survey, the average U.S. household paid $8,367 in federal income taxes in 2016. By 2019, that had risen to $8,831.
Seth Hanlon, a senior fellow at the Center for American Progress and ex-Obama staffer, tweeted Sunday night that in 2017 — the same year for which Trump paid $750," "a single worker without children who made $18,000 would have paid $760 in federal income tax."
How much does Joe Biden pay in income taxes?
Finally, a (relatively) easy one. Tax returns for Biden, the Democratic nominee for president, and his wife show they paid about $300,000 in federal income taxes in 2019. In 2018, they paid about $1.5 million; in 2017, they paid about $3.7 million.
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