They Earn $200,000 and Pay No Taxes

Death is inevitable, but federal income taxes aren't for an increased number of high-income earners.

New IRS statistics show 7,389 federal tax returns with $200,000 or more in adjusted gross income reported no federal income taxes in 2005. That's a 161% jump from the 2,833 comparable returns filed in 2004.

Additionally, 4,224 of the over-$200,000 earners reported no worldwide income tax liability on their 2005 returns, the IRS data show. That represents a 75% increase from the 2,420 comparable returns filed in 2004.

The data are the most recent available from the IRS. It shows a rising number of high-income earners have avoided the alternative minimum tax, which was intended to ensure that tax shelters, deductions and loopholes wouldn't exempt wealthy Americans from paying at least some federal income tax.

"It's an interesting case study on how people find ways to avoid paying taxes," said Howard Gleckman, a senior research associate and tax blog editor at The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

The increases stem in part from two tax law changes, according to the IRS Spring 2008 Statistics of Income Bulletin.

Responding to Hurricane Katrina, Washington exempted charitable contributions between Aug. 27, 2005, and Jan. 1, 2006, from the overall limit on itemized tax deductions and the 50% of adjusted gross income limit for such giving. The one-time change wasn't limited to hurricane-related contributions.

"There was no excuse for not restricting it to the affected area," said Joann Weiner, a former Treasury Department employee who analyzed the changes in her current job as a contributing editor at Tax Analysts, a non-profit publisher of tax information and data.

Under the American Jobs Creation Act of 2004, Washington also allowed taxpayers to eliminate up to 100% of their alternative minimum tax liability by using credits for any foreign taxes paid. Before tax year 2005, those credits could only eliminate 90% of federal income taxes.

Father's Day Decadence

High-income earners — guided by accountants and tax advisers — reacted swiftly to the change, which remains in effect. In 2004, IRS data show they reported $16.6 million in foreign tax credits. The following year, the total credits claimed soared to $447.3 million.

"You can make the case for this on the merits: You've paid taxes on the income once, why should you have to pay it again?" Gleckman said.

He and other tax specialists said they were unsure whether the no-taxes-paid trend is likely to accelerate. But they offered greater assurance that federal officials anticipated the likely outcome of the tax law changes.

"My sense of it is that the people who introduce these provisions know exactly who is going to benefit," Gleckman said.

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