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No taxes for some wealthy

By Kay Bell · Bankrate.com
Thursday, May 31, 2012
Posted: 1 pm ET

Nearly 4 million people, or almost 3 percent of all taxpayers, reported income of $200,000 in 2009.

And a fraction of those folks -- 35,061 to be exact -- also were able to escape any income tax payments that year.

That data, which showed a slight increase from 2007 in the number of tax-free higher-income filers, is courtesy of the Internal Revenue Service's Spring 2012 Statistics of Income Bulletin.

The IRS report also notes that another group of high-income taxpayers was able to offset most of its income before being subject to tax. These taxpayers, dubbed "nearly nontaxables" by the report, paid income tax equal to only a small share -- less than 25 percent -- of their incomes.

The numbers of the no-tax and nearly nontaxable are sure to add fuel to the tax fairness issue that will heat up as the November elections for president and Congressional seats near.

Small but important group

As the IRS points out in the report, these higher-income taxpayers who paid no or little taxes were a tiny part of the overall U.S. population. So why does anyone care?

First, anything that has to do with folks who make more money than most of us apparently is of great interest. That is, after all, what's keeping many cable television networks alive.

Secondly, any time anyone, regardless of how much or how little money they make, is able to avoid or substantially lower his or her tax bill, inquiring minds want to know.

That's why we gawk at the tax returns of presidents and presidential wannabes and debate whether billionaires such as Warren Buffett pay too much or too little. After all, comparing ourselves and our lives against others is one of America's fondest pastimes.

But the main reason we should pay attention when anyone is able to zero out a tax bill is because of how those taxpayers were able to accomplish this desirable feat.

Tax breaks for all

Both the wealthier nontax-paying individuals cited in the latest IRS report and the nearly 50 percent of folks in lower tax brackets who, according to 2011 data, paid no income tax share one trait.

They were able to zero out their tax bills thanks to the Internal Revenue Code.

Tax breaks for wealthier individuals in 2009 included a relatively new refundable alternative minimum tax credit. A tiny portion of these folks also were able to claim the first-time homebuyer credit.

Some of the credits that benefited wealthier taxpayers in 2009 were created in an effort to spur spending and economic growth. Generally, tax credits apply to people with lower incomes.

But in 2009 other changes, such as the continuing phaseout of limits on itemized deductions, which are typically claimed by higher earners, also helped them reduce their tax bills.

The question that must be answered is: Which of the current tax breaks do we want to keep?

Extreme tax reform advocates say get rid of them all in exchange for lower overall income tax rates for everyone. Others say that tax breaks for lower-income individuals are more cost-effective -- and easier to pass in Congress -- than providing federal assistance in other ways.

What do you think? Do we have too many tax breaks for too many? What tax deductions or credits do you claim that you'd be willing to give up?

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