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7 Facts About U.S. Federal Income Taxes You Should Know – History

The April 15 tax filing deadline (May 17, 2021, for tax year 2020) is one of the most dreaded days of the year for millions of Americans, either because they hate the hassle of preparing their taxes or dread the resulting tax bill.

Yet federal tax dollars fund several crucial programs, including benefits for veterans, Medicare and Medicaid, Social Security, and the Children’s Health Insurance Program. Taxes also support other initiatives you might not consider but rely on in your daily life, such as science and medical research, defense and international security, highways, and mass transit.

And even if you don’t like paying taxes, there are several crucial facts you need to know about them.

Tax Facts You Should Know

Taxes are kind of a pain, but there are some interesting facts you should know about them too. Some might even save you money.

1. Not Everyone Pays Income Taxes

Would you believe that nearly half of Americans pay no income taxes at all? In fact, some don’t even have to file a tax return. Before you start wondering how you can join that club, note that most people who don’t pay taxes have incredibly low earnings, such as young people who are new to the workforce or older adults who rely on Social Security benefits. However, many of those taxpayers do pay payroll taxes, sales tax, or state income taxes.

People whose income falls below a minimum amount don’t have to file a federal income tax return. That minimum amount usually corresponds to the standard deduction available for their filing status, although it’s much lower for married couples filing separate returns. According to the Form 1040 instructions, these are the 2020 filing thresholds:

Filing Status Age Minimum Gross Income
Single filers Younger than 65 $12,400
65 or older $14,050
Married filing jointly Younger than 65 (both spouses) $24,800
65 or older (one spouse) $26,100
65 or older (both spouses) $27,400
Married filing separately Any $5
Head of household Younger than 65 $18,650
65 or older $20,300
Qualifying widow(er) Younger than 65 $24,800
65 or older $26,100

These numbers apply as long as another person doesn’t claim you as a dependent on their federal tax return. If someone else can claim you as a dependent, the rules are a bit different. Check out Chart B in the IRS instructions for Form 1040 for those filing thresholds.

Even people who do file a tax return may not owe any taxes. Available tax deductions and tax credits can reduce taxable income to zero or even result in a tax refund over and above any withholding or estimated payments. That’s especially true for low-income families who claim refundable tax credits like the earned income tax credit and the child tax credit.

2. You Can Take a Tax Holiday

You can’t take a holiday from paying federal income taxes, but you might be able to take a break from paying sales tax, depending on where you live.

A sales tax holiday is a period when a state (and sometimes local) government waives or reduces sales tax on certain goods for a limited time — usually a week or weekend. These holidays have become an annual event in many states, and they often revolve around certain seasons, such as back-to-school shopping or hurricane preparedness.

In 2020, 17 states and Puerto Rico held state tax holidays or announced holidays for 2021.

Additionally, some states, including Alaska, Delaware, Montana, New Hampshire, and Oregon, have no state sales tax at all. If you live in a neighboring state, you can give yourself a tax-free holiday any time you want by crossing state lines to shop for back-to-school, major gift-giving holidays, or big-ticket items.

3. Fixing Our Tax System Is Complicated

Politicians and talking heads have a lot to say about filing taxes in the U.S. and how the government should spend those tax dollars. While it’s always worthwhile to look for new ways to improve our tax laws, it’s crucial to realize that decisions don’t happen in a bubble.

Some legislative proposals that sound good on the surface would have unintended consequences, while others may sound impossible or expensive but might work if properly implemented.

Examples include the FairTax, universal basic income, and universal health care.

The FairTax

Proponents of the FairTax want to replace income and payroll taxes with a 23% federal sales tax, claiming it would increase personal income, stimulate economic growth, simplify tax compliance, and make tax revenues easier to predict. However, although federal income and payroll taxes would go away, state income taxes would remain.

However, during former President George W. Bush’s term in office, his tax reform panel considered a national sales tax. But it scrapped the idea after realizing rates would have to be much higher than 23% for the system to work.

Universal Basic Income

The idea behind universal basic income (UBI) is that every adult citizen regularly receives a set amount of money from the federal government. UBI proponents claim it would alleviate poverty and replace other safety-net programs such as welfare, Social Security, and food stamps. However, according to the Center on Budget and Policy Priorities, providing a UBI of $10,000 per year to the over 300 million Americans alive today would cost the federal government more than $3 trillion per year — close to 100% of all tax revenue the federal government collects.

To lower costs and target aid to lower-income individuals, some legislators and policymakers favor a guaranteed minimum income. The program is similar to UBI but targets low-income individuals instead of being given out universally.

Universal Health Care

Universal health care is a system in which all residents are guaranteed access to health care. Proposals differ in organization, from providing health insurance for all citizens to subsidizing health insurance premiums for those who can’t afford it independently.

One universal health care system that has been in the news recently is “Medicare for All,” a national health insurance plan for all Americans that would replace private health insurance companies. How would the federal government pay for this? Through taxes, of course.

While none of the current Medicare for All proposals include a detailed tax plan, an analysis from the Committee for a Responsible Federal Budget suggests any tax increases required by Medicare for All would be offset by:

  • Eliminating the premiums individuals currently pay for private health insurance
  • Eliminating all out-of-pocket health care costs paid by individuals and families
  • Higher salaries for workers because their employers would no longer pay health insurance premiums

4. There’s a Very Slim Chance You’ll Get Audited by the IRS

The word “audit” strikes fear into the heart of many taxpayers, but the odds of getting audited are extremely low for most Americans. According to the IRS, of all the tax returns filed for tax years 2010 through 2018, the IRS audited only 0.60% of individual returns and 0.97% of corporate returns.

According to the Tax Policy Center, over 50% of federal revenue comes from individual and corporate income taxes. So you’d think the IRS would focus more on ensuring everyone pays their fair share. However, budget and personnel cuts over the past decade mean the IRS has less time and money to spend on oversight.

When the agency does pursue tax cheats, it follows the money, targeting wealthy taxpayers with high adjusted gross incomes. The IRS says taxpayers with incomes of $10 million or more have substantially higher audit rates than filers in other income categories.

Of course, that doesn’t mean you can get away with fibbing on your tax return. The IRS still audits hundreds of thousands of tax returns each year and uses sophisticated computer algorithms to decide which tax returns to audit. If your return includes a common IRS tax audit trigger or tax breaks you’re not qualified to take, your chances of being audited go way up.

Small-business owners and self-employed people must be especially careful. The IRS recently announced it plans to put more effort into auditing small businesses in 2021.

5. Have Patience if You Need IRS Help

Dealing with tax brackets, tax returns, tax debts, and IRS notices can be difficult. But the IRS has trained staff whose job it is to help taxpayers. Unfortunately, there don’t seem to be enough of them.

According to the Taxpayer Advocate Service’s annual report to Congress, the Internal Revenue Service received more than 100 million calls on its toll-free lines in the 2020 fiscal year. But IRS employees answered only 24 million of those calls, and taxpayers waited an average of 18 minutes on hold to get help with their tax situations.

You could try getting help in person, but that’s not easy, either. The IRS closed several of its Taxpayer Assistance Centers in recent years and operates on an appointment-only basis in the remaining locations. As a result, the number of taxpayers the IRS serves face-to-face declined from 4.4 million in 2016 to 2.3 million in 2019.

Before calling the IRS, check out the IRS’s self-help tax tools. You can do much of what you likely want to talk to an agent about, including check the status of your refund, pay your tax bill, check your account balance, apply for a payment plan for your tax liability, download tax forms, and order a tax transcript.

But note that IRS employees usually can’t help with general tax or personal finance questions, such as which expenses are deductible, whether you should contribute to an IRA or other retirement account, which charitable contributions are deductible, and whether you qualify for a dependent exemption.

For those types of questions, try getting help from a tax preparer or tax professional, such as a certified public accountant, commonly known as a CPA. They can also help you resolve tax issues by calling the IRS Practitioner Priority Service line — a special hotline staffed with IRS employees trained to help tax pros resolve their clients’ tax problems.

But even tax pros need patience these days. Service is limited due to the coronavirus pandemic, and long wait times are normal — especially during the peak tax season months of February through April. Your tax expert will also need you to sign Form 2848 giving them power of attorney to contact the IRS on your behalf.

6. Your Tax Bracket Isn’t the Rate You Pay on All Your Taxable Income

If you’re familiar with tax brackets, you may know that the U.S. federal income tax has seven tax brackets, ranging from 10% to 37%. You might think that if you fell into the 32% tax bracket, you pay taxes at a rate of 32% on all your income. But that’s not so.

The tax brackets are marginal tax rates, meaning that’s the rate that applies to each level of income. To illustrate, consider the 2021 tax brackets for single taxpayers:

Tax Rate Single
10% Up to $9,950
12% $9,951 – $40,525
22% $40,526 – $86,375
24% $86,376 – $164,925
32% $164,926 – $209,425
35% $209,426 – $523,600
37% $523,601 and up

So, if you’re a single person with $80,000 of taxable income in 2021, you are in the 22% tax bracket.

You would calculate your tax as follows:

  • 10% of the first $9,950 of income = $995
  • 12% of the next $30,575 of income = $3,669
  • 22% of the last $39,475 of income = $8,685

For 2021, your tax bill is roughly $13,349, making your effective tax rate around 17%.

It’s helpful to know your marginal tax rate because it can help you understand the tax consequences of earning additional income.

For example, say you’re considering buying an investment property that will net you an extra $25,000 of income per year and push you into the 24% tax bracket. You may decide that after taxes, the investment isn’t worth the time and effort you’d have to put into managing the property.

7. U.S. Taxpayers Enjoy Relatively Low Tax Rates Compared to Other Developed Countries

It might seem like Uncle Sam takes a large chunk of your money every time you file a tax return, but the U.S. is actually on the lower end of the scale compared to other developed countries.

According to a 2020 analysis from the Organisation for Economic Co-operation and Development (OECD), U.S. tax revenues are 24.5% of its gross domestic product (GDP). That’s well below the average of 33.8% for the other 35 OECD-member countries.

According to the analysis, these are the five countries with the highest tax revenues as a percentage of GDP:

  • Denmark: 46.3%
  • France: 45.4%
  • Belgium: 42.9%
  • Sweden: 42.9%
  • Italy: 42.4%

Only five OECD countries have lower tax revenues as a percentage of GDP:

  • Turkey: 23.1%
  • Ireland: 22.7%
  • Chile: 20.7%
  • Columbia: 19.7%
  • Mexico: 16.5%

Of course, that analysis looks at the revenues a country collects. What about tax rates for individuals?

The U.S. is on the lower end of the scale there too. In 2019, the Tax Foundation compared the top effective marginal tax rates for 40 European countries to the rates in the U.S. The U.S. ranked 32nd, with taxpayers paying roughly 47% of their wages in income taxes, social contributions, payroll taxes, and consumption taxes.

The highest-tax countries in the analysis were:

  • Sweden: 76%
  • Slovenia: 73%
  • Belgium: 73%
  • Portugal: 72%
  • Finland: 71%

The lowest-tax countries in the analysis were:

  • Slovakia: 45%
  • Lithuania: 44%
  • New Zealand: 44%
  • Mexico: 42%
  • Bulgaria: 29%

Final Word

The amount of taxes we pay and who pays them has always been a controversial topic among lawmakers and taxpayers alike.

For the most part, both political parties agree that the U.S. has too much debt, our increasingly competitive global economy impacts American workers and industries, and rising income inequality is a problem.

However, they disagree on the best way to address these issues. There aren’t any easy answers, but recognizing the issues and considering potential consequences before proposing changes to the tax code can ensure we address them — or at a minimum, avoid making them worse.

For more information on taxes, check out our tax guide.

Janet Berry-Johnson
Janet Berry-Johnson is a Certified Public Accountant. Before leaving the accounting world to focus on freelance writing, she specialized in income tax consulting and compliance for individuals and small businesses. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter.

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