Roberton Williams is the Sol Price Fellow at the Tax Policy Center. He was at the Congressional Budget Office from 1984 through 2006, most recently as Deputy Assistant Director for Tax Analysis, and before that an assistant professor of economics at Williams College. He has written numerous papers on tax policy, income distribution, and social welfare programs.
The deadline is looming: If you don’t have approved insurance coverage by March 31 (and are not exempt from the requirement), the Affordable Care Act will hit you with a penalty on your 2014 income tax return. It is often said the tax is $95, but for many people it will be much more. A new calculator from the Tax Policy Center shows just how big it could be.
For a single person who makes enough in 2014 to file a 1040, the penalty can be as little as $95 or as much as $3,600, depending on income. For families, the penalty is much larger: A couple with two children could owe between $285 and $11,000.
My TaxVox post last November explained what determines the penalty. For low-income households, it’s a fixed dollar amount: $95 per adult plus $47.50 per child, up to a total of $285. Higher-income families will owe 1 percent of their income (net of specified deductions), up to the average national cost of getting basic (bronze level) insurance coverage for all family members. According to the Urban Institute’s Health Policy Center, that coverage will cost about $3,600 per adult plus $1,900 per child in 2014.
The penalty will be higher in subsequent years—2 percent of income with a minimum of $325 in 2015 and 2.5 percent of income but at least $695 in 2016 (again with a cap equal to the average premium for bronze plans in each year).
Take the calculator out for a spin and see how big the penalty can be. But be warned: It’s almost always more than that widely-cited $95.
And after you’ve checked out TPC’s calculator to see what people will pay if they don’t enroll, you can use the Kaiser Family Foundation’s subsidy calculator to find out how big a subsidy they’d get if they do sign up for a plan.
Just in time for this year’s tax filing season (but a bit late for St. Valentine’s Day), the Tax Policy Center has updated its marriage bonus and penalty calculator. The new version lets you compare a couple’s income tax liability when they file as singles or as married for either the 2013 or 2014 tax year.
Some couples may pay a marriage penalty—a higher federal income tax bill than they would if they were single. But for most couples, marriage means a lower tax bill—a marriage bonus in tax-speak.
My August 21, 2012, TaxVox post about TPC’s original marriage bonus and penalty calculator explained why the tax code rewards some married couples and penalizes others. The American Taxpayer Relief Act of 2012 (ATRA) increased marriage penalties a lot for many high-income couples for their 2013 returns but there are no big changes in store for tax year 2014.
The calculator makes it easy to determine the tax consequences of marriage in 2013 or 2014. Just don’t use it to decide whether or not to marry—there’s more to life than taxes.
The Utah State Tax Commission yesterday reversed Governor Gary Herbert (R), ruling that same-sex couples may file their 2013 state tax returns as married, as long as they wed before the end of last year. The ruling also applies to couples who married in other jurisdictions.
As I discussed in my last TaxVox post, the governor ordered state agencies to ignore same-sex marriages performed in Utah during the brief period they were allowed under court order. When U.S. Attorney General Eric Holder subsequently ruled that those couples could file joint federal tax returns, tax filing became more complicated for affected couples.
The tax commission’s reversal undoes those complications in Utah, at least for 2013. Utah thus joins Oregon and Colorado, states that do not recognize same-sex marriages but nonetheless allow same-sex couples to file joint state tax returns if they file joint federal returns.
The situation in Utah could be short-lived. The tax commission emphasized that their ruling applies only to 2013 tax returns. Utah has appealed the judicial decision that allowed same-sex marriages in the state. If the decision is reversed, marriages performed during the brief period they were allowed could simply evaporate.
The tax commission promised couples who file joint returns based on the ruling that they would “not be subject to penalties for any tax deficiencies resulting solely from following this guidance.” If the appeals courts rule against them, those couples might have to amend their 2013 state tax returns—and possibly federal too—but at least they wouldn’t incur penalties.
But that outcome would leave a glaring inconsistency: the state is now on record as recognizing same-sex marriages performed outside of Utah but (assuming appeals courts agree) it constitutionally wouldn’t allow such marriages to occur in the state. That suggests that Utahns in same-sex relationships could marry outside the state and Utah would treat them as married, at least as far as state taxes are concerned.
The Supreme Court ruled last summer in U.S. v. Windsor that the federal government could not refuse to recognize same-sex marriages. In dissent, Justice Antonin Scalia wrote that the court had left “the second, state-law shoe to be dropped later, maybe next Term.” Until the Supreme Court drops that second shoe, we’ll likely watch states and lower courts stumble their ways toward workable and lasting solutions.
The battle over same-sex marriage in Utah not only raises important questions about marriage law; it also further complicates income tax filing for gay couples who tied the knot during the few weeks when those nuptials were deemed legal.
The problem: While federal courts hash out the legality of Utah’s same-sex marriages, gay couples who married in Utah must file state income tax returns as individuals but federal returns as married.
After a U.S. District Court judge ruled on December 20 that the Utah law barring same-sex marriages violated the U.S. Constitution, roughly 1,300 couples hurried to tie the knot. Just 2½ weeks later, the U.S. Supreme Court stayed further marriages until lower courts could rule on appeals. But the justices said nothing about the validity of the marriages that had already taken place.
In the absence of a court order, Utah Governor Gary Herbert (R) ordered state agencies to ignore the marriages. U.S. Attorney General Eric Holder Jr. took an opposite tack and ruled that federal agencies, including the IRS, should recognize the marriages as valid.
The conflict means same-sex couples who married during the hiatus will have to prepare at least three federal tax returns. First, they’ll have to file a federal 1040 as married (two if they file separately). Then they’ll have to prepare two more as individuals to use as the basis for their Utah state returns. For most of those couples, the biggest challenge will be determining how to divide joint income and costs between spouses. (Note that all unmarried couples with jointly held assets face this problem, regardless of sexual orientation.) Tax preparers or tax software will take care of the actual calculations.
Utah might have chosen an easier path for same-sex couples. In Missouri, Governor Jay Nixon (D) decided that state law requiring taxpayers to use the same filing status for both state and federal tax returns trumps the state’s constitutional ban on same-sex marriages. Missouri taxpayers who were legally married in another state or country must file federal returns as married and thus, by the governor’s order, must do the same with state returns. Colorado will follow a similar approach.
This is not a problem in the District of Columbia or the sixteen states that allow same-sex marriage because federal and state tax filing requirements do not conflict. Nor is it a problem in Oregon, which prohibits same-sex marriages in the state but recognizes those performed elsewhere.
And there’s no difficulty in the eight states that neither allow same-sex marriage nor have a state income tax. But the rest of the states deny same-sex marriages and make state tax filing more difficult for same-sex couples.
Maryland attorney Carol Calhoun has put together a nice summary of how state laws align with the federal income tax for same-sex couples. Here’s her scorecard:
Bottom line: Tax filing for same-sex couples will remain needlessly complicated in one-third of the states as long as state and federal returns treat their marriages differently. The Supreme Court dodged the constitutionality of state bans on same-sex marriage last summer (Hollingsworth v. Perry). But the Utah controversy could soon land back in the lap of the justices, giving them another chance to settle the marriage dispute and the related tax issues.
Effective tax rates have been rising since 2009 and will continue to rise for a few more years before they flatten out, according to Tax Policy Center projections.
My TaxVox post earlier this week showed how average federal tax rates have changed over the past three decades. But that was based on a 30-year history of federal tax rates produced by the Congressional Budget Office (CBO) that ends in 2010.
While we don’t know the future for certain, TPC has projected effective federal tax rates out to 2024. There are significant differences between the CBO and the TPC estimates but splicing the two projections together gives a reasonable picture of what will happen to rates for various income groups under today’s tax law.
TPC projects that average rates will rise for all income groups from their recent lows caused by the Great Recession and the tax cuts put in place to combat it (see graph). With incomes rebounding and most of the temporary stimulus tax cuts expiring earlier this year, average rates will rise by 2 or 3 percentage points between 2009 and 2015 for all but the top 1 percent, who will see a steeper 7 percentage point jump.
Rates will drift upward in subsequent years as real incomes rise. The poorest families will get hit harder in 2018 when they lose the remaining stimulus tax cuts, and the average tax rates for the top two income groups will decline as more of their income comes from capital gains and dividends, which face lower rates.
Splicing the CBO and TPC estimates together gives a longer view of what’s happening to tax rates, although we need to be cautious about comparing the two series—more on that below. Under today’s law, average tax rates will remain below their three-decade highs for every income group. However, the top 1 percent’s nearly 34 percent rate in 2016 will be close to its 35 percent peaks in 1979 and 1995. Overall, federal taxes should be at least as progressive as in the past.
The rate changes come from a combination of scheduled adjustments in the law and changes in levels and composition of income. We use CBO’s estimates of aggregate growth in wages, capital gains, and other forms of income over the next decade, and generally assume that recent trends in growth across income groups will continue. If actual incomes differ much from our assumptions, our estimates of tax rates could be far off the mark.
TPC and CBO estimates match up well for the seven years they overlap, though they do differ at the top. However, that similarity may be just chance. In fact, there are at least four major differences between the CBO and TPC estimates that could prevent them from matching up:
- Different taxes: Both analyses include individual and corporate income taxes and payroll taxes, but TPC adds estate taxes while CBO also counts excise taxes. Almost everyone pays excise taxes—think gasoline, tobacco, alcohol, and plane tickets—while estate taxes hit very few people.
- Different sources of income: CBO and TPC both include wage and salary income, investment returns, and business income. But CBO counts Medicare and Medicaid, for example, while TPC includes the returns on retirement accounts—so-called inside buildup.
- Different groupings of people: CBO looks at households—people who live together—while TPC focuses on tax units. The two are usually but not always the same.
- Different ranking methods: CBO assigns households to income percentiles based on an adjusted measure of income. TPC doesn’t adjust incomes so generally has more large units in higher income groups and more small units in lower ones.
Those differences mean that the two sets of estimates won’t align perfectly. Nevertheless, it is likely that under today’s tax law, average tax rates are headed sharply upward from their recession lows.
The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes.
The plan would raise fees in four areas.
Higher fees on air travelers would bring in an additional $12.6 billion over the next decade. Flyers would pay $5.60 for each one-way trip, up from today’s $2.50 per flight leg. The change would actually benefit some passengers—those who take three or more flights to reach their destinations—but most travelers would pay more. But, as the budget committee explains, the fee is voluntary—you only have to pay it if you choose to fly.
Boosting the amount paid by employers to fund the Pension Benefit Guarantee Corporation (PBGC) would bring in another $8 billion. The basic premium was already scheduled to rise from $42 per participating worker to $49 in 2014 and to climb with inflation after that. The budget plan would take it up to $57 in 2015 and $64 in 2016. Additional premiums for underfunded company plans and for discontinued plans would also increase. Of course, only firms that choose to hire workers have to pay the higher premiums.
Increased fees for customs users and conservation planning would bring in smaller amounts of revenue.
One other group would get hit with a non-tax that feels like a tax: government workers. People who take jobs with the federal government after 2013 will pay more into FERS—4.4 percent of their pay, up from 1.3 percent today—adding $6 billion to federal receipts over ten years. Paying more won’t give workers higher pensions. To them, the higher premiums will look a lot like a tax.
The House Budget Committee provides a convenient explanation of why fees are not the same as taxes. Fees, it explains, are payments for benefits people choose to receive. “Taxes, on the other hand, must be paid regardless of whether the taxpayer wants the services that those taxes fund.” That differentiation may hold up in theory but doesn’t in practice.
A couple of examples show the problem. I pay the TSA ticket fee because I choose to fly. How does that differ from my paying the gasoline tax because I choose to drive a gas-powered car? And how does the PBGC premium differ from FICA taxes that employers pay for their workers? Fees and taxes often aren’t very different for the people who pay them.
Members of Congress can vote for the budget plan and claim that they didn’t vote to raise taxes. That may be technically true but I’m not sure that their affected constituents will really believe them.
Just as President Obama was decrying our nation’s rising income inequality, the Congressional Budget Office provided him with some new ammunition. CBO’s latest report on household income and taxes—which goes only through 2010—shows that the rich have indeed gotten richer. (Full disclosure: In my former life at CBO, I helped assemble these income and tax data.)
CBO finds that over the past three decades, a growing fraction of income has gone to the top of the income distribution (see first graph). The top fifth saw its share of pretax income rise from 43 percent in 1979 to more than 50 percent in 2010. Much of the gain went to the top 1 percent, whose share increased from 9 percent to 15 percent over that period.
In contrast, households in the bottom two quintiles saw their income shares drop. The poorest 20 percent collected just 5.1 percent of pretax income in 2010, down from 6.2 percent in 1979. Households in the second quintile suffered a bigger decline—from 11.2 percent to 9.6 percent over the period.
This trend has been quite steady for the past three decades, though it was temporarily interrupted by the bursting of the dot-com bubble in 2000 and again in 2008-2009. But CBO shows inequality began growing again in 2010. That year, households in the bottom 60 percent got less than 30 percent of total income and the Tax Policy Center projects that their share will fall further in the future.
What about after-tax income? Has the federal tax system narrowed the disparity in incomes over the past 30 years? Not by much, according to CBO.
Average federal tax rates have fallen over the last 30 years but, at least until recently, households at all income levels benefited roughly equally. Between 1979 and 2010, the average tax rate declined by the same 6 percentage points for the bottom and middle quintiles as for the top 1 percent (see second graph).
We won’t know for a few years what has happened since 2010 but it appears that income inequality has once again grown. Wages have stagnated for low- and middle-income households while corporate profits and stock prices have skyrocketed.
The American Tax Relief Act of 2012 (ATRA) may have somewhat offset those relative changes in pre-tax income by raising taxes on high-income households. But those tax hikes at the top are too small to reverse the overall trend.
Inequality is a serious concern and it shows no sign of abating. The tax system may be part of the solution, but if past history is a guide, other policies will play much larger roles.
Stories about the Affordable Care Act often tell readers that they’ll have to pay a $95 penalty if they don’t get adequate health insurance coverage. But, like a lot of other things I read about the health law, that’s not quite correct. The penalty (which the Supreme Court said is actually a tax) could be less or, more likely, a lot more. It’s a complicated story.
The basic penalty is $95 in 2014—if you’re unmarried with no dependents and your income is less than $19,500. If your income is higher, you’ll owe more: 1 percent of the amount by which your income exceeds the sum of a single person’s personal exemption and standard deduction in the federal income tax. That’s $10,000 in 2013. But be warned: Income equals adjusted gross income (AGI—that number on the last line on page 1 of your tax return) plus any tax-exempt interest and excluded income earned abroad. If you make $30,000, your penalty will be $200.
Still with me? Good, because it is about to get more confusing.
If you’re married or have kids, you’ll owe a minimum of $95 per person for yourself, your spouse, and each dependent over age 17 plus half that amount for each child under 18. But the total can’t exceed three times the basic $95 tax, or $285. Except it can. If 1 percent of your income (minus your and your spouse’s personal exemptions and standard deduction—$20,000 in 2013—plus those add-ons) is more than $285, that’s what you’ll owe. Oh, and you’ll have to include your dependents’ income in the calculation.
But there’s a cap. Your total penalty can’t exceed the national average premium for a bronze-level health policy for your family’s size. We don’t know what that is yet but it’s surely more than $95. CBO projects that the average bronze premium in 2016 will be between $4,500 and $5,000 for an individual plan and more than $12,000 for families. If your income exceeds $1.2 million next year, that ceiling might apply.
That’s just for 2014. The penalty will grow over time: The dollar minimums will be $325 in 2015 and $695 in 2016 and will grow with inflation after that (rounded down to multiples of $50). By 2023, it will hit a projected $800. And the percentage of income penalty also grows—to 2 percent in 2015 and 2.5 percent after that.
Some people won’t have to pay the tax. Even if you don’t have insurance, you’re safe if you have religious objections to health insurance, are an American Indian, are in jail, or are “not lawfully present” in the U.S., among other reasons. You’re also protected if buying insurance would impose economic hardship. That happens if it would cost more than 8 percent of your income (defined slightly differently of course).
If you owe a penalty, you’re supposed to pay it with your income tax return. But there’s not much the IRS can do if you don’t pay. They can’t put you in jail or garnish your wages. In fact, about the only way the IRS can collect is if you’re due a refund. They can deduct the penalty from this year’s and future refunds.
A well-known radio personality is urging people to avoid the penalty by making sure you won’t get a tax refund. Ignore him. Trying this requires many years of careful planning and is easy to mess up. Besides, most Americans love their refunds.
There is, of course, a simpler way to avoid the penalty: Sign up for health insurance.
Last week’s IRS ruling on same-sex marriages received a lot of attention. Going forward, a same-sex married couple must file federal income tax returns as married, regardless of whether the state where they live recognizes their marriage. In addition, same-sex couples may—but don’t have to—file amended returns for some earlier years to recoup any extra taxes they paid because they had to file as individuals.
But most reports on the ruling have missed an important detail: the IRS will begin applying the new rule on September 16. That gives same-sex couples who haven’t yet filed their 2012 tax returns just a few more days to file as individuals if they choose to do so. For some, that could mean a much smaller tax bill.
At issue are marriage penalties, the additional income tax some couples have to pay because they must file their federal tax returns as married. Because tax parameters aren’t proportionately higher for couples than for singles—for example, higher tax brackets for joint filers apply at less than twice the income as for individuals and phase-in and phase-out ranges don’t start at double the income level—some couples pay more income tax than if they were single. That’s most likely to be the case if spouses have similar incomes.
For example, if both spouses earn $100,000, have no children, take the standard deduction, and have no other income, their 2012 tax bill filing jointly would be $38,319. If they could file individual returns, each would pay $18,731 in income tax. The total—$37,462—would be $857 less than what they’d pay as a couple. They pay a marriage penalty.
Of course, many couples pay less tax than they would if they were single and thus get a marriage bonus. If one spouse earned all of the hypothetical couple’s $200,000 income and the other earned nothing, filing jointly would save them nearly $9,000, a hefty marriage bonus.
It’s not always obvious whether a couple will pay more or less tax because they are married. You can get an idea of the difference between filing jointly or as individuals using the Tax Policy Center’s Marriage Bonus and Penalty Calculator. But one warning: the calculator cannot take account of every tax situation—you’ll have to complete and compare joint and single tax returns to find the exact bonus or penalty. Of course, the same rules will soon apply to both same-sex and heterosexual couples.
For a few more days, however, same-sex couples who were legally married last December 31 and who haven’t yet filed their 2012 tax returns can avoid marriage penalties one last time by filing individually. If you’re in that situation, you could save a lot of money if you get your 2012 tax return in soon.
Disclaimer: the Tax Policy Center doesn’t give tax advice. If you have any doubts about how the new tax laws would affect you, consult a real tax advisor.
Most of the 43 percent of Americans who the Tax Policy Center projects will pay no federal income tax this year make very little money. Some are middle-income households that qualify for enough tax preferences to zero out their tax bills. But more than 70,000 households with income over $200,000 will pay no federal income tax in 2013. How will they do that?
Some have very high medical expenses but the two biggest reasons are linked to their investments: foreign tax credits and tax-exempt bonds.
TPC’s hit video explains why the 43 percent pay no federal income tax. But for a closer look at why high-income households pay no income tax, it helps to turn to the IRS’s Statistics of Income (SOI) division.
Each year, SOI focuses on two overlapping groups of returns with income over $200,000: those who pay no income tax to the U.S. and those who pay no tax worldwide.
The first includes people whose U.S. liability is zeroed out by domestic tax preferences combined with foreign tax credits and the exclusion of overseas income taxed abroad. The second includes only those who don’t pay any net income tax at all. The analysis also uses two alternative measures of income to define high-income tax units: adjusted gross income (AGI) and “expanded income,” which adds excluded income such as tax-exempt interest and untaxed Social Security. (The second measure is closer to—but not the same as—the Tax Policy Center’s “expanded cash income.”)
The latest installment of the SOI analysis found that about 3 percent of the 143 million tax returns filed in 2010—4.3 million—had expanded income over $200,000. Almost 33,000 (0.8 percent) paid no tax to the IRS in 2010 and about half of those paid no income taxes worldwide.
Nearly 40 percent of those paying no domestic income tax benefitted most from the foreign tax credit and roughly another third saved most because of tax-exempt interest. Various itemized deductions mattered most for about 15 percent of tax filers.
Among those who had no worldwide tax liability, coupon-clipping was the biggest reason. Fully 60 percent of the 16,000 returns paying no net tax benefited most from tax-exempt bond interest. Extraordinary medical expenses, which are currently deductible to the extent that they exceed 10 percent of AGI, were the main reason why another 11 percent of high-income households paid no tax.
It’s likely that some taxpayers save a lot by using tax avoidance techniques that don’t show up in the SOI data. Some of the most successful tax shelters simply defer or otherwise mask income so that a well off person can appear to have relatively modest means.
Most of the high-income tax filers who don’t pay income tax hardly get off scot-free. Those who don’t pay the IRS because of foreign tax credits obviously ante up to other countries. Those who benefit from the exclusion of municipal bond interest pay an implicit tax since tax-exempt bonds earn a lower interest rate than taxable bonds. And, of course, high-income households pay many other taxes. But for a small group of lucky duckies, our current system of tax preferences makes it possible to avoid paying any federal income tax.