The Nontaxpaying Affluent Grew by 15% in One Year

Friday, July 1, 2005

(New York Times)

Published: July 1, 2005

The number of affluent individuals and married couples who paid no federal income taxes jumped more than 15 percent in 2002, to 5,650, new government data showed yesterday.

The chances of having a large income but not paying taxes on any of it are growing, according to the data, issued in the Internal Revenue Service's annual report to Congress on well-to-do Americans who live tax free. About one in every 436 high-income Americans paid no taxes in 2002, up from one in 531 in 2001 and one in 1,010 in 2000.

Over all, the top 2 percent of earners, the 2.5 million filers with income of $200,000 or more, paid almost 27 cents in taxes for each dollar of income they reported in 2002, other I.R.S. data showed. This group accounted for 53.5 percent of the income tax paid by all Americans.

Among that high-income group, however, almost 83,000, or one in 33, paid less than a dime in taxes for every dollar of income. An additional 79,000 paid less than 15 cents. The average for all Americans was 13 cents.

Congress taxes Americans on their worldwide income. Of the 5,650 individuals and couples who paid no income taxes to the United States, only 728 paid any to a foreign government, while 4,922 lived completely free of income tax.

The I.R.S. measured income in two ways.

One was by adjusted gross income, the last line on the front page of the Form 1040 tax return. By this measure, 2,959 affluent individuals and married couples paid no federal income tax, down from 3,385 in 2001, but up from 2,328 in 2000. There were 60 such examples in 1977, when a dollar was worth three times as much as in 2002.

On a worldwide basis, 2,551 such individuals and couples paid no tax in 2002, down from 2,875 in 2001, but up from 2,022 in 2000. There were 37 such examples in 1977, the first year the agency disclosed such data.

The second measure, giving a fuller picture, was expanded income, which also includes money from sources like tax-exempt interest and untaxed Social Security benefits. By this measure, 5,650 well-to-do individuals and married couples paid no federal income tax in 2002 , up from 4,910 in 2001 and 2,766 in 2000. There were 85 such examples in 1977.

Worldwide on this basis, there were 4,922 individuals and couples who lived tax free in 2002, up from 4,119 in 2001 and 2,320 in 2000. There were 64 such examples in 1977.

The I.R.S. report said that "the most important item in eliminating tax" was taking income in the form of tax-exempt interest on state and municipal bonds. Nearly two-thirds of those who lived tax free reported income from such bonds.

The four largest items that reduced income subject to taxation, the I.R.S. said, were miscellaneous deductions; interest paid on borrowing to finance investments; various tax credits; and large medical bills, which can be deducted once they exceed either 7.5 percent or 10 percent of adjusted gross income, depending on the taxpayer's circumstances.


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