20 Amazing Tax Facts You Need to See to Believe
It's crunch time, folks. In just eight days your federal income tax return is due to be postmarked to the Internal Revenue Service. Considering that recent data released by the IRS shows a decline in year-over-year tax filings, we've got quite a few more procrastinators than normal this tax season.
For many, tax time is a bittersweet process. It means slogging through a year's worth of W-2s, receipts, and financial documents, and reading up on the latest tax changes. But it can also offer rewards for tens of millions of Americans in the form of refund checks.
With the spirit of tax season in mind, here are 20 of the most amazing tax statistics you have to see to believe.
Image source: Getty Images.
1. The U.S. tax code is more than 10 million words long
One the primary reasons people absolutely hate tax time is the complexity of the tax code. According to the Tax Foundation, the U.S. tax code was nearly 10.1 million words long as of the end of 2015, and it has grown by an average of 144,500 words per year since 1955. And you wonder why we need tax professionals and/or tax software to help us out.
2. The simplest IRS tax form requires more than 100 pages of explanation
The basic tax form that most taxpayers will fill out is Form 1040. But get this: according to the IRS' website, there are more than 100 pages of instructions detailing how to fill out Form 1040 and what each line means. Once again, thank goodness for tax preparation software!
3. People spend 8.9 billion hours complying with federal tax laws
Preparing your taxes and complying with federal tax laws takes a lot of time, and this isn't lost on the IRS or the federal government. According to a 2016 estimation from the IRS, taxpayers were expected to spend 8.9 billion hours complying with federal tax laws last year. If time is money, that's a lot of dough!
4. $29.6 billion is spent annually on tax preparation software
According to the National Taxpayers Union Foundation's annual tax analysis in 2016, complying with individual and corporate tax codes cost a whopping $234.4 billion. However, what's truly eye-popping is the $29.6 billion taxpayers spent on tax software, tax preparation fees, supplies, and other pertinent tax-filing expenses.
Image source: Getty Images.
5. Nearly three-quarters of taxpayers get federal refunds
Though the percentage of taxpayers who receive a federal refund will usually vary from year to year, it often falls between 70% and 75%. This means Uncle Sam often cuts more than 100 million refund checks in a given year. Then again, it also means more than 100 million tax filers have done a poor job of tax planning by letting the federal government hang onto their money with no interest earned.
6. The average American is netting around $3,000 from their federal refund
As with the percentage of taxpayers who wind up receiving a federal refund, the average amount received varies from year-to-year. As of March 3, 2017, the average refund processed by the IRS was $3,016. Though there is some variance, the average tax refund over the past decade has often ranged between $2,800 and $3,040 more years than not.
7. The average effective income tax rate is 13.5%
Chances are very good that you're paying an effective income tax rate that's a lot lower than your peak marginal tax rate. According to the IRS' preliminary data from the 2015 tax year, some $1.45 trillion in income tax was owed to the federal government, working out to an effective income tax rate of 13.5% based on what was earned by all taxpayers. The standard deduction and a generous cadre of deductions and credits typically allow taxpayers to reduce their tax liability.
8. The rich pay a majority of federal income taxes
Argue that the rich don't pay their fair share of income taxes all you want, but the data pretty clearly shows that the wealthiest Americans pay a majority of income taxes. According to the Tax Policy Center, the top quintile (top 20%) of income earners are responsible for paying 69% of all federal taxes, with the top 1% responsible for an insane 43% of federal taxes collected.
Image source: Getty Images.
9. Close to half of all households pay no federal income tax
On the flipside, the Tax Policy Center finds that a lot of households (nearly half) don't pay any federal income taxes as a result of healthy deductions and credits. In 2015, 77.5 million American households (45.3%) owed a big fat goose egg ($0) in federal income taxes.
10. Today's peak tax rate is actually quite low
The wealthiest Americans today pay $0.396 in federal income tax for each $1 in earned income. This 39.6% peak ordinary tax rate might seem high, but it's actually pretty low by historical standards. For more than 50 years the peak marginal tax rate was 50% to, at one point, well over 90%. If you happen to fall into the top tax bracket, count your blessings that it's not 1944 or 1945 when the top tax rate peaked at 94%!
11. Among states, Louisiana has the least-favorable combined tax rate
When thinking of the least tax-friendly states, Louisiana probably isn't the first to come to mind. Yet, according to the Tax Foundation, it presents with the highest combined tax rate of 9.98%. The state sports a 5% sales tax, and the average local tax rate is 4.98%, with some cities as high as 7% (implying a combined tax of up to 12%). Yuck!
12. Among countries, the U.S. has the third-highest peak marginal corporate income tax rate
President Trump has been championing the idea of corporate tax cuts for years. The reason? According to the Tax Foundation, the U.S. has the third-highest peak marginal corporate tax rate in the world, trailing only the United Arab Emirates and Puerto Rico. This makes luring foreign investment to the U.S. quite the chore.
Image source: Getty Images.
13. Some of your income is double-taxed
If you think you're not getting a fair shake from the government, you might be right in some rarer instances. Take dividend income as a good example. If a company you've invested in turns a profit, it has to pay corporate income tax on the money it's earned. Then, assuming it pays you a dividend, you get taxed on the dividend income you receive. That's the same dollar being taxed twice!
14. Filing an extension doesn't give you a free ride
One of the more common tax misconceptions arises when taxpayers file for extensions. An extension is usually a smart option if you'll be out of the country for an extended period of time, or if you haven't received needed paperwork by the Tax Day deadline. Though extensions do give taxpayers an additional six months to get their returns completed, theydon't give them extra time to pay their bills. Taxpayers are expected to pony up at least 90% of what they expect to owe by Tax Day, otherwise they could face hefty penalties and interest.
15. The EITC is among the most defrauded credits
The Earned Income Tax Credit (EITC) is a bountiful dollar-for-dollar deduction that's given to millions of low- and middle-income hardworking Americans each and every year. It's also one of the most defrauded tax credits. According to estimates from the IRS, between 21% and 26% of EITC claims are paid in error each year, equating to $15.6 billion in erroneous payments in 2015. Not surprisingly, the IRS is delaying refunds for EITC and Additional Child Tax Credit recipients this year by a few weeks to give them an extra look.
16. Capital gains on the sale of a home is arguably the most generous exemption
Tax credits and deductions are great, but every taxpayer loves a great exemption -- and there may be none better than the capital gains exemption from selling a home. As long as you owned and lived in your home for at least two of the past five years, you can claim up to a $250,000 capital gain on your sale as an individual, or $500,000 as a couple, and have that gain be completely tax-exempt. Any gains above these amounts are taxable.
Image source: Getty Images.
17. Filing a paper tax return leaves you 41 times more likely to make an error
If you're an old-school tax-filer, just stop! According to TurboTax, the chance of having the IRS find an error on your hand-prepared tax return is 21%! Comparatively, the chance of an error with an electronically filed tax return is just 0.5%. That's right, you're 41 times more likely to make an error if you file your taxes like it's the 1980s.
18. A majority of Americans qualify for free tax assistance
Preparing your taxes can cost you both time and money. For most Americans, it doesn't have to cost a red cent. The IRS makes its tax preparation software, known as Free File, available for free to those earning $64,000 or less. Furthermore, people earning $54,000 or less can qualify for the Volunteer Income Tax Asssitance Program where volunteers will assist taxpayers in the tax-prep process. Seniors 60 and older can also benefit from the Tax Counseling for the Elderly program.
19. You can earn up to 30% or $10 million for tattling on a tax-evading individual or employer
Who said being a tattletale doesn't pay? The IRS Whistleblowers Office pays money to blow the whistle on people and businesses who fail to pay their federal income taxes. The reward is often based on a percentage of what was collected in taxes, penalties, and interest, but it can total up to a maximum of $10 million, or 30% of what was collected.
20. The IRS is exceptionally cost-efficient
Last, but certainly not least, keep in mind just how incredibly cost-efficient the IRS is. For every $100 it collects, the agency spends just $0.35. We often think of the Social Security Administration as particularly cost-efficient with an expense rate of 0.7% of its revenue, but the IRS is simply twice as good when it comes to reigning in costs.
The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.