The zero-tax filers will be largely low-income. Indeed, 75 percent of them will earn less than $20,000 per year and 97 percent will earn less than $40,000. Fewer than 1 percent will earn more than $75,000 per year – a group comprised largely of business owners whose tax liabilities will be erased due to business losses, carry-overs from prior year AMT payments, or foreign tax credits.
Zero-tax filers will be overwhelmingly young. Looking at the age of the primary breadwinner on these tax returns, only 22 percent are 45 years old or older. More than one-third (36 percent) are younger than age 25, and 56 percent are younger than age 35.Interestingly, there is a large cluster of households (22.4 percent) where the principal wage earner is between the ages of 35 and 44. Most likely, these are modest-income families who are benefitting most from the increased value of the child credit to $1,000...In general, then, those who don’t pay federal income taxes tend to be young families with children, often headed by a single mother, where the head of household has a job and is trying to make ends meet on a modest income.
About 46 percent of American households will pay no federal individual income tax in 2011, roughly half of them because of structural features of the income tax that provide basic exemptions for subsistence level income and for dependents. The other half are nontaxable because tax expenditures— special provisions of the tax code that benefit selected taxpayers or activities—wipe out tax liabilities and, in the case of refundable credits, result in net payments from the government. Most important of those tax expenditures are provisions that benefit senior citizens and low-income working families with children.
In 1997, Congress enacted a new $500 per-child tax credit and expanded the Earned Income Tax Credit (EITC) for low-income workers. The 2003 tax cuts increased the value of the child credit to $1,000. These two tax credits – especially the child credit – have had a powerful effect on reducing, and many cases eliminating, the income tax liability for millions of Americans. Of the 44 million tax returns that pay no income taxes, 34 percent claim the EITC and 50 percent claim the child credit. Tax Foundation economists estimate that the expanded child credit alone knocked 5.8 million families with children off the tax rolls.