Lately there has been so much talk about taxpayers who don’t pay any federal income taxes. Since we are normally only aware of our own personal tax situation, the following scenarios below show how much money a family can make without owing federal taxes
Here are some of the most common deduction and credits that exist. This will help one in understanding the chart below.
Standard Deduction: Each year the IRS allows a flat deduction off ones income. The amount is different depending on whether the taxpayer is filing as a Single ($5,800), Head of Household ($8,500), or Married Filing Joint ($11,600).
Exemptions: Each year the IRS allows a flat deduction off your income for the number of exemptions on a tax return. There is one exemption for each taxpayer and dependent claimed on the return. In 2011 that amount is $3,700 per exemption. It will rise to $3,800 in 2012.
Child Tax Credit: Up to $1,000 credit (direct reduction of your tax) per qualifying child under age 17.
Earned Income Credit: The EIC is a refundable credit that is determined by your earned income and number of qualifying children. For those who qualified, the maximum credit for 2011 was as follows: $464 no children; $3,094 one child; $5,112 two children, and $5,751 for taxpayers with three children. This credit is like a bell curve; it slowly increases as ones income goes up and then it levels out and slowly decreases after the income reaches a certain threshold that is adjusted each year.
The tax law for 2011 was used for the calculation below and it is assumed that child/children live in the same household as the taxpayer and the child/children are under 17 years of age. The earned income in these scenarios represents the maximum wages a family can earn and still not owe taxes.
Keep in mind that the median household income at the end of August 2012, as reported by Sentier Research, was $50,678. As you will see below, many married taxpayers with families who make about that much can completely eliminate their federal tax liability.
Married Filing Joint with one child: Wages $37,800; Standard Deduction $11,600; Personal Exemption $11,100; Child Tax Credit $1,000; Earned Income Credit $528; Tax Liability equals $0.
Married Filing Joint with two children: Wages $45,350; Standard Deduction $11,600; Personal Exemption $14,800; Child Tax Credit $2,000; Tax Liability equals $0.
Married Filing Joint with three children: Wages $55,700; Standard Deduction $11,600; Personal Exemption $18,500; Child Tax Credit $3,000; Tax Liability equals $0.
As you can see, there is a direct relation with the size of the family and the amount of income that can be earned while still incurring zero tax liability. If a family makes less than the wages above then they will most likely qualify for the Earned Income Credit and in those situations they will receive a refund.