Life on EZ Street : More High-Income Earners Avoid Federal Tax
It’s still possible to make a lot of money without sharing it with Uncle Sam.
The Internal Revenue Service says 779 couples and individuals reported earning more than $200,000 on returns filed in 1990 and paid no federal income tax. They earned $340 million, an average of $436,000 apiece.
The number of high-income non-taxpayers almost doubled from 397 a year earlier and is the highest since the IRS began publishing the reports on orders of Congress in 1977. But they still represent only about one of every 1,000 filers at that income level.
“The number of all returns--taxable and non-taxable--with incomes of $200,000 or more has risen substantially, (but) the percentage of non-taxable returns has not changed as significantly,” the IRS said.
The report shows that an additional 8,020 over-$200,000 earners paid less than 5% of their income in tax; 15,246 paid between 5% and 10%. More than half those who earned more than $200,000 paid less than 25%.
The IRS said 1,817 couples and individuals managed to earn between $100,000 and $200,000 without paying taxes. An additional 21,920 had incomes between $50,000 and $100,000 and zero tax liability.
The big tax bill currently making its way through Congress apparently would do nothing to bring the 779 couples onto the tax rolls.
The measure, designed to reduce the budget deficit, would increase the top tax rates on high earners, raising the tax burden on the average over-$200,000-a-year filer by about $25,000. But those who use legal deductions and credits to wipe out their tax liability would not be touched by those higher rates.
“Only in the wrong direction” would the bill change the number of non-taxpayers, said Robert McIntyre, director of Citizens for Tax Justice, a labor-financed research group. The number could be increased, he said, by provisions affecting charitable contributions of appreciated property and deduction of losses on some passive real estate investments.
The best tax shelter continues to be the tax-exempt bonds issued by states, cities and counties to finance schools, roads and other public projects. The IRS estimated that 492 over-$200,000 earners had tax-exempt interest, averaging $392,000.
On average, the biggest single factor in eliminating tax liability is losses from partnerships and businesses organized as Subchapter S corporations. Such losses were listed on 232 of the 779 untaxed high-income returns and averaged $500,000. By comparison, only 71 of the tax-free returns showed profits from such businesses, averaging $343,000.
The gap from farming operations was even greater. The IRS said only six of the 779 returns showed net income from farming--an average of $77,000--but that 336 reported farm losses, averaging $263,000.
The IRS statistics are taken from tax returns as filed. Presumably, many of the returns were audited, and those examinations could result in the IRS denying claimed losses or deductions, thus making taxpayers of the non-taxpayers.
The 779 also escaped the net known as the “alternative minimum tax.” That is a special levy designed specifically to ensure that all high earners pay some tax even though legitimate deductions would wipe out their regular tax liability.
But it does not apply to deductions for interest, casualty losses or medical expenses. The report shows 69 returns claimed an average $436,000 deduction for casualty and theft losses; 47 had medical expenses averaging $196,000 and 339 took interest deductions averaging $235,000.
Some other items from the high-income, no-tax returns:
* 287 of the 779 reported wages and salaries, averaging $203,000. * 108 had net earnings from a business or profession, averaging $151,000, while 75 showed losses, averaging $203,000. * 302 reported capital gains, averaging $343,000. * 666 had dividends, averaging $110,000; taxable interest averaging $140,000 showed on 742 returns. * 98 reported net income from rent, averaging $92,000; 179 had rent losses, averaging $102,000. * 84 had non-taxable Social Security benefits that averaged $5,845. * Four reported unemployment compensation, averaging $7,750. * Fewer than half the untaxed returns--373--claimed itemized deductions; they averaged $482,000. * 351 claimed deductions, averaging $44,500 for state and local taxes paid. * 334 reported charitable contributions, which averaged $75,805. * The interest deductions included home mortgage interest that averaged $93,000 on 290 returns.
Lifestyles of the Rich and Tax-Free
Do you have what it takes to be rich and tax-free? Here are some characteristics of the 779 wealthy couples and individuals earning more than $200,000 who paid no federal income tax in 1990: Their earnings: An average of $436,000 apiece. Their favorite tax shelters: Losses from partnerships and small businesses organized as Subchapter S corporations were essential for many in eliminating tax liability. Such losses were listed by 232 of the group and averaged $500,000. Tax-free municipal bonds also were a popular tax shelter, with 492 earning tax-exempt interest that averaged $392,000. Many shared their wealth: 334 reported charitable contributions averaging $75,805. Many were not totally tax-free: 351 claimed deductions averaging $44,500 for state and local taxes paid.
