Over 100 million U.S. households paid no federal income tax last year

Almost 107 million households — clustered on the lower rungs of the income ladder — had a $0 federal income tax liability in tax year 2020, according to the estimates released Thursday by the Tax Policy Center.

But the situation is both unusual and temporary as the economy improves and pandemic-related tax credits fade away, noted Howard Gleckman, a senior fellow at the Washington, D.C.-based think tank.

The percentage of households without a federal income tax liability usually hovers around 40% — and it will be 2022 before getting back to that point, the Tax Policy Center’s estimates show.

These households still had payroll taxes, state income taxes and sales taxes to pay up. Approximately 20% of households paid neither federal income taxes nor payroll taxes in 2020, up from almost 17% in 2019, the research found.

This year, culminating in tax returns filed in 2022, the Tax Policy Center estimates that 101.7 million households — 57% of the tax base — will not have a federal income tax bill.

That can be partly attributed to the tax effects of the third round of stimulus checks and boosted credits like the child tax credit and earned income tax credit, Gleckman said.

It can also be linked to improving job conditions and more pay for people who were once out of work.

Assuming tax laws stay where they are now, an estimated 74.8 million households (41.6% of the tax base) will not face a federal income tax bill in 2022, the estimates showed.

The projections were based on Tax Policy Center modeling, not IRS statistics for a tax year where people can still file through Oct. 15.

Low incomes

There are two powerful forces at play, Gleckman said. First off, “COVID wrecked the economy. It threw a lot of people out of work,” Gleckman said.

Many of those people, he added, were on the lower end of the income ladder and, as a result, faced smaller income tax bills to begin with. Without income to report, their tax exposure fell even lower.

The income tax brackets start at 10%, and in 2020, it kicked in for individuals making up to $9,875 and $19,750 for married couple filing jointly. The 12% bracket for individuals ran up to $40, 125.

Nearly half (40%) of the households making under $40,000 who had a job in February 2020 didn’t have it one month later, Federal Reserve data revealed. Approximately 22 million people were laid off early in the pandemic, and 6.7 million workers still aren’t back in the labor force.

Stimulus checks

Secondly, the two rounds of stimulus checks in 2020 effectively reduced the liability even further, Gleckman said. Technically speaking, the economic impact payments were refundable tax credits that the Internal Revenue Service paid in advance.

The stimulus-check payment “in effect, was subtracted from the taxes you owed. You could almost think of it as getting an advance refund.”

The first round of direct checks paid $1,200 to adults and $500 for eligible children, while the second round paid $600 apiece. As of earlier this year, the IRS said it distributed more than $412 billion in payments between the two batches.

Congress had other ways to reduce 2020 tax bills, Gleckman noted. For instance, the American Rescue Plan passed in March exempted the first $10,200 in jobless benefits from federal income taxes.

The IRS has received 152.4 million tax returns as of early June, and distributed more than 100 million refunds. The average refund was $2,775, it said.

“It’s very important as many people as possible contribute to the general operations of the government because they have a stake in the operations of the government,” Gleckman said.

But he still viewed the findings as an anomaly that illustrated just how jarring 2020 was for households. “If this was a permanent and not a pandemic-driven phenomenon, this would be very troubling to me,” he said.