Some middle-class families will have a tax rate of zero this year — or less
The American Rescue Plan signed into law by President Joe Biden delivered $1.9 trillion of aid to shore up families, businesses, and cities and local governments amid the ongoing pandemic. But it will also have another impact by lowering the average individual tax rate to almost zero — and even less — for families earning below $75,000 a year.
So estimates the nonpartisan Joint Committee on Taxation (JCT), which recently published its forecast for average individual tax rates in 2021. Because of an expansion of tax credits such as the Child Tax Credit and federal stimulus payments, low-income families will effectively get an influx of money back from the IRS.
Middle-class taxpayers earning $50,000 to $75,000 will have an effective average tax rate of -1.9%, while those earning between $75,000 to $100,000 will face a tax rate of 1.8%, the JCT found.
That's a shave compared with prior years. Take 2018, the first full year that the Tax Cuts and Jobs Act went into effect, which provided a tax cut to most households but primarily lowered taxes on corporations and wealthy individuals. During that year, taxpayers earning between $50,000 to $75,000 were estimated to have an effective average tax rate of 2.4% and those earning $75,000 to $100,000 had an estimated average tax rate of 4.8%, according to the Joint Committee on Taxation.
To be sure, that doesn't mean everyone in those income brackets will enjoy the lower tax rates this year, since people may not qualify for some of the tax credits — for instance, the Child Tax Credit (CTC) is only available to families who have children under 18. The estimate also excludes payroll taxes, which cover Social Security, Medicare and other federal programs, and state taxes.
The American Rescue Plan engineered much of its relief aid through the tax code, noted Garrett Watson and Erica York at the Tax Foundation. For example, $1,400 per person stimulus payments are actually tax rebates that are paid out as cash by the IRS, similar to the two previous rounds of direct stimulus checks.
The other major tax provision that will effectively reduce tax rates this year is the Earned Income Tax Credit (EITC), which was expanded through the American Rescue Plan.
Both the CTC and the EITC are refundable. That simply means people will get some or all of the credits refunded to them even if they don't pay federal income taxes, which can occur with some low-income households.
Biggest beneficiaries
The biggest beneficiaries of the American Rescue Plan are low-income households, who are in store to receive a significant bump in tax credits through the stimulus plan. It's not unusual for low-income households to receive more in tax benefits than they pay in income taxes, but the difference in 2021 is the size of the benefit.
The stimulus checks, CTC and EITC programs are likely to provide a 33% boost to the pre-tax incomes of the poorest 20% of Americans — a $3,590 hike per family — the Institute on Taxation and Economic Policy found earlier this year. While those three benefits provide a similar dollar amount of typical benefits to 95% of U.S. households, the impact is much greater for lower-income households because the tax credits represent a larger share of their incomes.
That impact was by design, given that lower-income households have faced greater struggles in regaining their footing amid the pandemic-stricken economy. Twenty million jobs were lost last year, but college-educated workers have rejoined the workforce at a faster clip than those with high school degrees, for instance.
While the IRS is still sending out $1,400 checks to taxpayers, another round of direct payments are in store for later this year. Starting in July, families with children under 18 will get monthly checks from the IRS for each child — $300 per month for each child under 6, and $250 per month for each child from 6 to 17. Those payments will end in December, and will be directed toward all households except the highest earners.
That could help low-wage workers who can't work remotely and will benefit from regular monthly checks, according to the left-leaning Center on Budget and Policy Priorities.
"The Child Tax Credit expansion will provide important help to people in a myriad of jobs that pay little and often have fluctuating schedules, including people caring for the elderly, driving buses, cooking and serving meals, and doing many other kinds of important work," its analysts said last month.
