While President Joe Biden and congressional Democrats are readying their plan to hike incomes taxes on the wealthy, a new government report shows that their $1.9 trillion relief package slashed taxes for lower- and moderate-income Americans for this year.
Taxpayers earning less than $75,000 annually will pay no tax, on average, in 2021, thanks to a multitude of provisions in the American Rescue Plan, which Biden signed into law last month. Instead, lower-income Americans can expect to receive hefty refunds – though, of course, that will vary depending on every individual’s finances.
Those with incomes between $75,000 and $100,000 a year will pay an average tax rate of just 1.8%, according to the Joint Committee on Taxation, a non-partisan group that assists Congress with tax legislation.
This is a far bigger tax cut for Americans on the lower and middle rungs of the income ladder than the reductions contained in the Republicans’ Tax Cuts and Jobs Act of 2017.
Those earning between $50,000 and $75,000, for example, paid an average tax rate of 2.4% in 2018, the first year the Republican tax cuts were in effect.
By contrast, this bracket won’t pay anything at all for 2021, on average, and those earning even less are due to receive larger refunds than they did three years ago, according to the committee’s annual federal tax system report.
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However, an important point to keep in mind: Most of the tax breaks in the Democrats’ relief effort are one-time measures or last only for a year or two.
“The key thing to remember is that it’s only temporary,” said Howard Gleckman, senior fellow in the non-partisan Urban-Brookings Tax Policy Center. “This is a temporary phenomenon. In a sense, it’s a little bit misleading because it’s only for a year.”
Benefits for lower-income and middle class Americans
Much of the reduction for the lower and moderate income groups comes from the stimulus payments contained in the Democrats’ rescue package passed in March, which were technically advance tax credits.
More than 160 million households are eligible for the payments, which are worth up to $1,400 per person. The full amount goes to individuals earning less than $75,000 and married couples earning less than $150,000. But then the payments gradually phase out as income goes up, cutting off completely individuals who earn at least $80,000 a year and married couples who earn at least $160,000.
Families with children under the age of 6 will receive $3,600 per child, while those with kids between the ages of 6 and 17 will receive $3,000 for each child annually. That’s up from a maximum of $2,000 per child under age 17. The full enhanced portion of the credit is available for single filers with annual incomes up to $75,000, heads of households earning up to $112,500 and married couples making up to $150,000 a year.
Parents can expect to receive half the credit on a monthly basis between July and December and the rest when they file their 2021 tax returns. The credit will also be fully refundable for 2021 so more low-income households can take advantage of it.
The package also enhances the earned income tax credit for workers without children by nearly tripling the maximum credit and extending eligibility to more people. This is the largest expansion to the earned income tax credit since 2009.
The relief law also contains many spending measures, which is historically how Democrats have assisted lower-income Americans, Gleckman said. It extends the federal boost to unemployment benefits and food stamps and provides aid to struggling renters and homeowners.
Clear differences between the laws
The latest coronavirus relief package was geared to help the less fortunate, who have been hit hardest by the pandemic.
The bottom 20% of taxpayers will receive a 20.4% boost in after-tax income and a $2,850 reduction in federal taxes, on average, from the relief law, according to the Tax Policy Center. The next group will see a 9.3% increase in after-tax income and $3,260 decline in federal taxes.
However, the top 20% will experience only a 0.7% bump in after-tax income and a $1,900 decrease in tax levy, with the top 1% seeing essentially no change.
By contrast, the Republicans’ tax cuts heavily benefited wealthier Americans. The top 20% and the top 1% both received a 2.2% boost in after-tax income and saw their federal tax bills decline by nearly $5,800 and by $32,650, respectively, the Tax Policy Center found.
Meanwhile, the lowest 20% received only a 0.3% bump in after-tax income and a $40 break in federal taxes. The second quintile got a 1% income boost and a $320 reduction in their tax bill.