Taxation & Estate Planning

High Income Earners who Do Not Pay Taxes

By Darrin Mish

Believe it or not, there are a group of high income earners in the US who paid no income taxes last year. These people earned more than $200,000 in 2009 yet were able to legally avoid paying taxes through a combination of charitable donations, deductible medical expenses, foreign tax credits and casualty and theft losses (remember how Warren Buffet said his secretary paid more income tax than he did?). In a report released recently, the IRS said, "High-income returns are more often nontaxable as a result of a combination of reasons, none of which, by itself, would result in nontaxability?.

But not everyone who earned more than $200,000 per annum paid zero taxes. The number of people in this category was 20,752 among the 3.9 million households with incomes above $200,000 in 2009. This reflected an increase from 0.51% to 0.53% of high income earners (or 1 in 189) who avoided paying taxes in 2009. These people even avoided paying the alternative minimum tax, the tax designed to ensure the rich pay at least a minimum amount of tax.

However, the number of households earning more than $200,000 per annum fell in 2009 compared to the year before. In 2009, 3.9 million households (2.8% of the population) had adjusted gross income of above $200,000 whereas in 2008, the number was 4.4 million (3.1% of the population).

Generally about 50% of those who submit tax returns do not pay taxes because their taxable income has been reduced to zero due to tax breaks such as the earned income tax credit and child tax relief coupled with personal tax exemptions. These are mainly the lower and middle-income households. But it is distressing to see the wealthy having their tax liability eliminated as well.

The IRS report has rekindled the debate on the fairness of our tax system. Those in the Democratic Party want to increase taxes especially on those earning high incomes. In response, President Barack Obama has proposed the now famous Buffett rule that imposes a 30% minimum tax on high earners while a congressional proposal implementing the rule set the threshold for the 30% tax at $2 million. Besides this, President Obama has also supported limiting the amount of deductions and the tax exemption for municipal bond interest that would make it harder for high income earners to avoid paying taxes.

Frank Clemente, campaign manager for Americans for Tax Fairness said, ?We need to reorient our whole system so it?s much fairer to those folks who are working at the wage level and haven?t benefited from this tremendous increase in income which happened at the top end of our economy.?

High Income Earners who Do Not Pay Taxes is a post from: IRS Tax Problem Solver Blog - IRS Help

Full post as published by IRS Problem Solver Blog on June 01, 2012 (boomark / email).