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High earners escaping tax

By Kay Bell · Bankrate.com
Thursday, June 16, 2011
Posted: 1 pm ET

I'm feeling a bit left out when it comes to taxes. The problem is that I seem to pay them. Apparently, I'm doing something wrong.

In the last few months, there's been a lot of attention on the reported 51 percent of folks who've figured out how to avoid paying income taxes. A good portion of this group is low-to-middle-income earners and they've taken advantage of the many refundable tax credits sprinkled throughout the tax code to wipe out their tax bills and even get some money back from the Internal Revenue Service.

Now, however, we learn that Americans making a lot more money also have figured out how to avoid paying income taxes when they file their returns.

In the IRS's latest Statistics of Income report issued this week, agency data reveals that the percentage of people who reported incomes of at least $200,000 and paid no U.S. taxes almost doubled in 2008 (0.429 percent) from 2007 (0.231 percent ). IRS data are always a few years behind since it takes a while to compile all the figures.

What do those fractions mean in real numbers? Of the almost 4.4 million individual income tax returns in 2008 that reported adjusted gross income of $200,000 or more, 18,783 people were able to get by on April 15 without owing anything on their 1040.

OK, the raw numbers, like the percentages, aren't that big. Still, the IRS calculations reveal that the number of high-income taxpayers owing no taxes in 2008 is the biggest percentage of nonpayers going back over data collected since 1977.

And since I wasn't a no-tax filer back in 2008 (I checked my records), I was curious as to how these high-earners managed to escape that April 15 without owing anything on their 1040s.

Just like their lower-earning counterparts, the high-income return filers used legal deductions, exemptions and credits to avoid owing any income taxes.

The tax breaks that contributed the most in higher-income filers' reduction of their tax liability to nothing were, according to the spring Statistics of Income report, total miscellaneous deductions (including casualty theft losses from income-producing property), the taxes paid deduction (for real estate, state income and sales taxes), partnership and S corporation losses and tax-exempt interest.

Between 2007 and 2008, these specific tax break claims increased by 1,241.7 percent, or 447 returns, for miscellaneous deductions; 771.2 percent, or 933 returns, for taxes paid; 364.1 percent, or 1,216 returns, for business losses; and 295.9 percent, or 5,929 returns, for tax-exempt interest claims.

OK. Enough numbers. Let's look at what the figures tell us: Everyone, at all income levels, gets tax breaks that help them reduce or even eliminate their tax bills.

And that brings us back to the dilemma facing Congress, and ultimately all of us: Which tax benefits are we willing to give up in exchange for reducing the federal deficit and simplifying the tax code?

It's easy to get angry and point fingers at other taxpayers at all income levels, but we better have a mirror handy. Almost all of us -- including corporations -- are benefiting some way from all the various tax breaks woven through our current tax system. Do we really want to change that?

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7 Comments
WorkinIT
July 17, 2011 at 8:23 am

S.SureBrec, be prepared to be afraid. The fact is that over 50% of the American People get back every penny paid into the IRS and a good portion of those get back more than they put in thanks to Earned Income Credit and other wealth redistribution efforts undertaken by our Federal Government. The People have found a way to vote themselves income. Why work when I can get the government to steal someone else's money and give it to me? Somehow, I just can't bring myself to live that life yet.

JimmyO
July 14, 2011 at 10:16 pm

It is amazing how the story focuses on the miniscule percentage of "high earners" that did not pay income tax. A fact that is misleading since many of these were S corporation filings with business losses. The much bigger issue is the 51% of filers who do not pay income tax. The author glosses over the fact that our tax system has become so progressive that the 51% who do not pay income tax are all too eager to suggest that the 10% that pay 71% of the taxes pay even more. Enough with the class warfare. America is crumbling under the weight of the debt. I suggest we reform the tax code and make sure EVERYONE pays at least 18% of their income to fund government.

Ron Bledsoe
July 12, 2011 at 3:46 pm

Part of the major problem is the 51% that do not pay income taxes are the ones getting all the benefits.

Secondly, what is wrong with reduceing the tax rate and every one pays the same percentage regardless of income with a NO refund system. What a deal everyone becomes an owner in the process. Every one shares in responsibility to prevent fraud waste and abuse of the system.
I did not say elimate the social benefits, just ensure everyone pays a fair share into them.
There would actually be more money available for our government to waste.

Oh, by the way, the social benefits, in order to qualif for welfare, foodstamps reduced school tution for lower income, make random durg testing a requirement. you use illeagle substances, you forfiet your eligibility.

yes, there is probably some missspelling in this get over it, you get the point.

The very wealthy hane more incentives to create more jobs.

S. Sure Brec
July 06, 2011 at 1:46 pm

"The problem is that I seem to pay [taxes]." Kay Bell must have chosen the wrong talking point. It's not that those 51% don't pay taxes - which would be scary if it were true - but it's they don't owe any taxes on April 15th. That means they already paid too much taxes and the government now owes them a refund. What does that mean? It means you're giving the government an interest-free loan.

If you owe anything to the government on tax day, that means the government gave you a no-interest loan - something that's beneficial. To get this no-interest loan, increase your federal and state deductions - you can do this without having a mortgage or kids - it's just a number that's in the system. You get a larger paycheck every time but you owe the government at the end. The best scenario is when the balance on April 15th is around zero. It means you don't have to pay anything and you didn't give the government a no-interest loan.

So 51% of people aren't bright. Yep, that's about right.

Other than that, the rest of the article - about everyone benefitting from tax breaks - makes sense. The only issue is... if we remove all the tax breaks and we pay more... would people we work for increase our salaries? The answer is: no. People want to get more money and they don't care where it comes from - they can't get it from the corporations (that's what unions do - they make corporations pay larger salaries) so they get it from the other source - the government. If we had responsible corporations that increase salaries that boost morale rather than focus so much on the bottom line that they create high turnover (which hurts them in the end), then this wouldn't be a problem.

Angry Voter
June 22, 2011 at 3:39 am

Most people don't realize that property ownership by value is far more concentrated than income.

The US originally had a property based tax system that reduced the effect.

Income tax on wages is what keeps productive people from catching up to the people that are already rich. Only rich people would design a system that taxes billionaires less than doctors, teachers and soldiers.

bumrocky
June 20, 2011 at 3:40 pm

I agree, a fair tax is the way to go. Not only would you get more revenue by removing the loopholes, but even the undocumented workers who currently pay nothing to the system would start paying taxes. This would increase the revenue to the tune of 10 million taxable people, if you believe the numbers being thrown out there.

Homeless
June 16, 2011 at 8:37 pm

If this country and government would use their brains they would eliminate the ridiculous, loop-hole riddled tax code along with the the billions of dollars spent on the IRS and institute The Fair Tax. Then these people - lower, middle and upper class - will ALL pay taxes.

EVERY SINGLE PURCHASE would provide revenue to the run the country (NOT LINE WASHINGTON'S POCKETS). The uber-rich would not be able to hide their money overseas. When a lower class person buys a used car, they would not pay any tax, but the rich guy buying a brand new Maybach WOULD, without escape!

Read Neal Boortz's Fair Tax Book with an open mind on how the code would TRULY work if is implemented as intended. The wealthy will start doing exactly what everyone wants them to do PAY THEIR FAIR SHARE.