Earn Under $75K? You Might Pay Nothing in Taxes Next Year – But There’s a Catch

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If you’ve been wondering how various incentives including stimulus checks and tax credits related to COVID-19 could affect your taxes in the coming year, you might be in for a pleasant surprise depending on your annual income.

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According to a recent report from The Congressional Joint Committee on Taxation, Americans who make less than $75,000 a year will pay, on average, no taxes in 2021. Taxpayers making under the specified amount will have no tax liability after deductions and credits when 2021 tax returns are filed, according to the report.

An individual’s income tax liability may be reduced by using available credits which can usually include certain business expenditures, foreign income taxes, education expenditures, certain healthcare costs and child care expenditures, the legislators add.

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For tax year 2021, an individual will be able to claim a “refundable and advanceable child tax credit for each qualifying child under age 18.” The amount of this credit increased this year from $2,000 in 2020 to $3,600 per child under 6 years of age and $3,000 per child aged 6 and older.

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On average, taxpayers in this category will have no tax liability after accounting for all of the deductions and credits available to them when they file their 2021 tax returns, reports CNBC. In fact, those households may also get money back from the IRS. They add that those who make between $75,000 and $100,000 a year will pay an average tax rate of just 1.8%.

Both the earned income tax credit and the child tax credit were expanded under the American Rescue Plan, and both are refundable. This means that even if you don’t owe any taxes, you can still get some or all of the credits refunded to you.

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So what’s the catch?

These projections are estimates by the Congressional committee given the expanded amount of deductions and credits — they claim “on average” people who make under $75,000 will not owe taxes, but this does not mean everyone.

This also refers to your income tax — not your federal taxes. You will still owe federal taxes, but these are typically taken automatically out of your paycheck and are usually for Medicare and Social Security.

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Since these projections are averages, you will need to check for yourself if you are one of the many that will be able to enjoy a tax-free 2021.

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Last updated: May 28, 2021

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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