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61% of U.S. households paid no federal income taxes in 2020

Yahoo Finance’s Denitsa Tsekova breaks down the rise in households not paying federal income taxes.

Video Transcript

[MUSIC PLAYING]

ALEXIS CHRISTOFOROUS: A whopping 60% of US households paid no income tax last year. And that trend is likely to continue this year. In today's Your Money segment, Yahoo Finance's Denitsa Tsekova here to tell us why. Denitsa, fill us in. What's going on?

DENITSA TSEKOVA: So, yeah, as you said, what we've seen during the pandemic is a significant increase. So that's a 40% increase in the number of US households not paying federal income taxes. So these are nearly 107 million households, 61% that owed no federal income taxes in 2020. And we're expected to see very similar rates in 2021. After that, those rates are expected to return to normal.

This is driven, firstly, by the rise in financial hardship during 2020. Obviously, millions of workers lost their jobs. And lowest income workers were hit disproportionately hard. So for many low wage workers, who previously paid little income tax before the pandemic, that drop in income, because they lost their job, meant that they owed even less money to the IRS and, in this case, no money. Another driver is, of course, the government's response to the pandemic. And a big part of it was the tax based assistance provided by the government.

And, obviously, the stimulus payments we've talked so much about, two of them were in 2020. And the stimulus checks, when it comes to taxes, they're actually a refundable tax credit. So what they do is they effectively reduce the household's tax liability. So that's a big reason why many households didn't have to pay taxes to the IRS in 2020. And of course, the CTC credits, they were also expanded.

The earned income tax credit and those, they don't have impact in 2020, but they will do in 2021. And similarly, they're both refundable credits. And they reduce or eliminate many household's tax liability for 2021. And we're only talking about federal income taxes. So those families are still paying sales taxes, payroll taxes, and other taxes. So this is only the group of taxes they actually don't pay.

ALEXIS CHRISTOFOROUS: Right. Good distinction to make, only federal taxes here. But that still is quite a savings for lots of folks. So tell us which group of taxpayers is actually benefiting from this.

DENITSA TSEKOVA: Exactly, yeah, federal and state, in many cases, the rates will be very similar. And the group that benefits the most is families with children. And we're talking specifically about families with children that are low income to mid-income. so households that make below $28,000 now effectively pay no federal income tax in 2021. For the next income bracket, that rate's reduced, of 3/4 of those people will not have to pay taxes in 2021.

And then, as you go up the income ladder, fewer and fewer people don't have to pay taxes. And, of course, in 2020, we're going to see similar rates, first because the third stimulus payment, which was $1,600, was distributed in 2021. And additionally, all those tax credits, including the last payments we're currently getting out of the CTC, will impact taxpayers in 2021 and reduce their tax liability.

ALEXIS CHRISTOFOROUS: All right. Denitsa Tsekova, thanks, as always, for filling us in. Appreciate it.