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About Six in Ten American Households Didn’t Pay Federal Income Taxes Last Year

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If you need any more evidence of the financial impact COVID-19 had on the United States, try this: Roughly six in 10 Americans didn’t pay federal income taxes last year, according to a new report from the Urban-Brookings Tax Policy Center.

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The report, released on Wednesday, estimates that nearly 107 million U.S. households, or about 61%, owed no income tax or even received tax credits from the federal government. The share of non-payers in 2020 was about 40% higher than the pre-pandemic year of 2019.

There’s no mystery as to why. In an analysis on the Tax Policy Center website, senior fellow Howard Gleckman wrote: “The COVID-19 pandemic and the policy response to it led to an extraordinary increase in the number of American households that owed no federal individual income tax in 2020.”

The combination of a bad economy and multiple rounds of government relief accounted for much of the decline. About 20 million workers lost their jobs, the Tax Policy Center noted, and many of those were low-wage workers who paid very little income tax even before the pandemic.

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Moreover, because the stimulus checks sent to Americans were designed as refundable tax credits, the tax liabilities for recipients were significantly lowered in both 2020 and 2021. Some of the stimulus payments even flipped households from paying income tax to not paying it, the report found.

Lower-income Americans weren’t the only ones who felt the pinch, however. As previously reported by GOBankingRates, a recent survey conducted by Natixis Investment Managers found that even some affluent Americans were negatively impacted.

According to that survey, 9% of respondents – those with $100,000 or more in investible assets – said they lost their job or business for at least part of the year. About 25% said they lost personal or household income during the pandemic, and 19% said they were forced to tap personal savings and other assets to make up ground. Overall, nearly one-fifth said they experienced a setback to their financial security.

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With the economy and job outlook improving, you can expect the percentage of households that owe federal income tax to eventually return to normal.

“The spike is likely to be temporary,” Gleckman wrote. “The share of non-payers will decline to about 102 million or 57 percent this year. And (the Tax Policy Center) projects that the percentage will return to pre-pandemic levels in 2022 and continue to decline after that, assuming the economy continues to rebound and several temporary tax benefits expire as scheduled.”

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