More than half of U.S. households paid no federal income taxes in 2021, a temporary spike attributed to massive COVID-19 relief spending in the form of tax credits and stimulus payments.
A recent analysis from the nonpartisan Urban-Brookings Tax Policy Center estimated that 57% of Americans paid no taxes last year. While that's down slightly from last year's 60%, it marks a significant increase from the 44% recorded before the pandemic began.
"The number of households who paid no income tax last year truly was eye-popping," Tax Policy Center Senior Fellow Howard Gleckman wrote. "But keep in mind: It was only temporary."
The increase stems from the pandemic-driven surge in government spending, including three stimulus checks, expanded federal unemployment aid and the expanded child tax credit.
Because the stimulus checks were designed as refundable tax credits, they significantly reduced tax liability in both 2020 and 2021, the analysis said. And in some cases, the checks flipped some households from paying income tax to not doing so.
Essentially, no household making less than $28,000 paid federal income tax last year, nor will a majority – about 75% – of those making between $28,000 and $55,000. Among middle-income households, about 43% paid no federal income tax.
Still, while many households did not pay federal income tax, most Americans still owed payroll or state income taxes. The study shows that about four out of five individuals paid at least one of these taxes. Nearly everyone paid the government in another form, whether through state and local sales taxes, excise taxes, property taxes or state income taxes.
Households that pay no federal income taxes are expected to plunge to 75 million next year, or a little less than 42%. By 2026, the number of Americans not paying any federal income tax is projected to drop to about 40% under current law. And middle-class Americans will likely see their tax liability rise in coming years. By next year, only about 21% will be nonpayers. That figure is expected to drop to 18% in 2026.