Thousands of wealthy earners manage to zero out tax bills

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By Allison Linn

More than 35,000 people who had income of more than $200,000 in 2009 paid no federal income taxes that year, according to a new report from the Internal Revenue Service.

The non-taxpayers were among the top 3 percent of all earners with more than $200,000 in "expanded income," which includes adjusted gross income plus other less common sources of income such as tax-exempt interest or foreign income.

The number of wealthy people who paid no federal income taxes rose between 2007 and 2009, thanks in part to new tax credits, according to the report.

Programs such as a relatively new refundable alternative minimum tax credit and the first-time homebuyer credit helped a tiny portion of these wealthy earners to zero out their federal tax bill.

Some of those credits were introduced as a way to help spur spending and economic growth.  Previously, the main tax credits available only applied to people with lower incomes.

For 2009, the report found that about nearly 4 million people, or about 2.8 percent of all taxpayers, had expanded income of $200,000 a year. About 0.8 percent of them, or 35,061 people, paid no federal income tax.

More than 4,000 of those people benefited from the new tax credits, according to the report.
The total number of wealthy people who did not pay any income taxes increased slightly from 2008 but saw a major jump from 2007, likely due to a combination of factors.

In general, the report noted, it takes a number of credits and deductions for a wealthy person can zero out a tax bill. These can include things like tax-exempt interest, medical deductions and charitable contributions.

Some wealthy taxpayers also likely paid taxes to other countries even if they did not pay them in this country.

Nearly half of all  American households don’t pay any federal income taxes, thanks to tax credits, deductions and other provisions in the tax code. However, many of those taxpayers are poor or elderly.

The issue of whether wealthy people pay their fair share of income taxes has been in the spotlight for nearly a year, since billionaire Warren Buffett implored lawmakers to tax the rich more. The so-called Buffett Rule, which would have required some millionaires to pay more in taxes, was rejected by the Senate in April.