Just Explain It: Why taxes for most are rising while others don’t pay any federal income tax

The fiscal cliff has been averted, but at a cost. Most Americans will pay higher taxes this year.

According to the Tax Policy Center, 77% of American households will face higher federal taxes in 2013.

Here’s how it breaks down. If you’re an individual making over $400,000 a year, or a family pulling in more than $450,000 — your taxes will increase by almost 5%.

Tax rates on capital gains and dividends for wealthier households will go from 15% to 20% under the agreement.

Every worker will see an increase in taxes. That’s because Congress let the payroll tax cut expire on December 31st. So for every $100 you earn in 2013, up to $113,700, you’ll take home $2 less than you did last year.

The debate over taxes was a major part of last year’s presidential election. President Obama did what he said and raised taxes on the wealthy. The question of who should bear more of the tax burden was a hotly contested topic. Is our tax system fair? And are the wealthy asked to do more while others contribute nothing?

It has often been quoted that almost half of Americans don’t pay federal income taxes. In fact, former Republican Presidential nominee Mit Romney created controversy last year when he described those that don’t pay federal income taxes as “victims… who are dependent upon government.”

The truth is most Americans pay taxes in some form or another, but not everyone pays the federal income tax. Bob Williams, a Senior Fellow at the Tax Policy Center, says “the income tax was set up in a way that allows people not to pay it by doing particular things.” Williams authored a report that found 46% of Americans in 2011 (47% in 2010) didn’t pay federal income tax because they took credits and deductions for things like, going to school, retirement savings plans, childcare and mortgages.

Here’s a look at how a family might end up not paying any federal income taxes.

If a couple earning $51,000 with childcare expenses of three thousand dollars a year for their two kids under 13. At that income level, the family would have a basic tax liability of almost $2,600. But after standard deductions, credits for childcare, this family’s net tax bill would be -$12. The family wouldn’t have to pay federal income tax at all in 2012.

In certain cases wealthy Americans who earn over $1 million don’t have to pay federal income taxes either. For example, if your business losses offset positive income or, if you’re given credit for foreign taxes to avoid double taxation.

Billionaire investor Warren Buffett believes the rich don’t pay enough in taxes. Buffett said his 2010 tax bill was $6.9 million. That was about 17.4% of his income. Even though that’s a lot of money, he was taxed at a much lower rate than 20 other people in his office. An average of 36% of their income went to taxes.


If all of this seems complicated to you, you’re not alone. Income taxes have been a point of contention in this country since Abe Lincoln and Congress introduced them 150 years ago. About the only thing Americans agree on is that the tax code has to be simplified.

Did you learn something? Do you have a topic you’d like explained? Give us your feedback in the comments below or on Twitter using #justexplainit.



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