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0% Tax Rate? For Some Middle-Class Families, That Could Be the Case This Year

by
Spencer Wilson
on
5/12/2021
0% Tax Rate? For Some Middle-Class Families, That Could Be the Case This Year

When Congress passed the American Rescue Plan and President Biden signed it into law, its goal was to provide financial relief to the businesses, households, and municipalities that were hard-hit by the global pandemic. Though the support is broad, it was specifically designed to have its greatest impact on the low-income families who have suffered the greatest losses over the past year. A recently released report from the nonpartisan Joint Committee on Taxation (JCT) has estimated that the $1.9 trillion aid package will have the effect of reducing the average taxpayer’s individual tax rate to almost zero, and families earning less than $75,000 per year may find their tax rate dropping into negative numbers.

This eye-popping forecast will be particularly good news for the twenty million people who lost jobs last year. Between the federal stimulus payments and the expansion of the Child Tax Credit and other supportive tax credits, those earning $50,000 to $75,000 will see their effective average tax rate drop to -1.9%. The tax rate for those earning between $75,000 and $100,000 will be taxed at a rate of 1.8%. The IRS will be sending these families significant refund cash. The majority who will benefit are the low-wage workers without college degrees that the rescue plan specifically targeted. While most college-educated workers rebounded and returned to work, many with only high school degrees are still struggling.

The tax rates that will be seen for 2020 represent a sizeable drop from what these households paid under the Tax Cuts and Jobs Act that took effect in 2018. Though billed as a tax reduction program, the beneficiaries of that plan were largely the wealthy and corporations. According to the Joint Committee on Taxation, in 2018 families that earned between $50,000 and $75,000 paid tax rates averaging 2.4% and those earning between $75,000 and $100,000 paid tax rates that averaged 4.8%. The rescue plan also lowered tax rates by making changes to the Earned Income Tax Credit, which it expanded.

The estimates are just that — the predicted numbers will by no means apply to every family. In calculating their forecast the JCT assumed eligibility for the Child Tax Credit (CTC), and that only applies to families who have children under 18. There are other variables that were assumed or left out, including the payroll taxes that pay for Medicare, state taxes, Social Security, and other programs. Still, even if the ultra-low rates cited by the JCT don’t apply to every family, there is no question that low-income households will reap the biggest rewards from the American Rescue Plan. Though it’s nothing new for these families to be entitled to tax credits that far exceed the taxes that they owe, the impact of the stimulus checks, Child Tax Credit and Earned Income Tax Credits for 2020 are taking it to a whole new level. The Institute on Taxation and Economic policy calculated that the poorest families will realize a 33% increase of $3,590 in pre-tax income, and though most American households will see that same dollar figure in tax credits, for families with little income that amount of money makes an enormous difference.

In crafting the American Rescue Plan, lawmakers purposely created a way to get relief to the American public in the form of tax rebates being paid out in cash by the Treasury as well as other methods using the tax code to facilitate the process. The same strategy was used with the two earlier stimulus checks. Because the tax credits that these families are entitled to are refundable, even those who don’t pay federal income taxes are likely to be on the receiving end of additional cash.

The American Rescue Plan will continue to impact American families well past tax season. While $1,400 stimulus checks continue to be distributed, the summer will see all but the highest earning families receiving monthly checks of $300 or $250 per month for each child under the age of 6 or between 6 and 17, respectively. Those payments are slated to be paid each month through the end of the year.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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