47% of Eligible Taxpayers Pay No Tax? Just Who Are the 47%?

During the recent elections, there was lots of talk about the 47% that pay no federal income tax.  The 47% have been portrayed as freeloaders or slackers that don't want to pay their fair share.  Is this an unfair portrayal?  Just who are the 47%, and what are their financial circumstances? 

I work as a tax return preparer and have used the tax prep software utilized by the firm I work for to map out some scenarios to show just how fair or unfair this portrayal is.  The earnings used in these hypothetical situations are realistic approximations of what people actually earn in today's economy. 

Let's start with the situation that perhaps illustrates best this contention: that of retirees.  Our hypothetical retired couple has income from Social Security and a modest pension.  Under my scenario, this couple could have yearly Social Security benefits equalling a total of $28,000 and collect $20,000 annually from the pension and still owe no federal taxes.  That's an annual income of $48,000, tax-free!  Why is it tax-free?  Because these people have paid into Social Security for some 30 + years and have already paid taxes on that money.  For this reason, Social Security benefits are usually untaxable.   Now let's assume that one of our hypothetical couple is blind.  They could then take in a additional $1450 and still owe no tax.    

Now let's consider a young adult, working a job that pays the Illinois minimum wage of $8.50 per hour, working 40 hours per week, while attending college full-time.  This person would have annual earnings of $17,680.  Let's say that this person has taken out student loans and is paying $5000 per year in tuition with the loan money.  This student/worker would owe no federal tax and would actually get a refundable tax credit of $1000.

Take the same young adult and assume that he/she is unemployed, but still attending college.  Maximum unemployment benefits for a single person in Illinois are $388 per week, for an annual total of $10,088, assuming the maximum 26 weeks of unemployment benefits.  This person could earn approximately an additional $18,000 in wages and still owe no federal tax. 
Here is another scenario.  A wage earner has been laid off from his job and has exhausted his unemployment benefits.  He borrows money from family member to start his own business.  He works hard to make the business a success, but loses money on the venture for the first few years, as happens often with new businesses.  This person owes no federal tax. 
When considering the 47%, a lot of people only think of the single mothers struggling to raise fatherless children and getting big refunds because of Earned Income Credit.  1,488,984 tax returns claiming this credit to offset any taxes, resulting in a net tax liability of $0, were filed in 2009, the last year for which statistics are available.  This is out of a total 140,494,127 tax returns filed in 2009.  This means that 10% of all eligible taxpayers got a refund of nothing or a refundable credit of more than they paid in.
These provisions were put into the federal tax code to try to improve the lot of the less fortunate in our society. 

Sources:

Illinois Department of Employment Security
www.ides.illinois.gov

The United States Social Security Administration
www.ssa.gov

Internal Revenue Service
www.irs.gov

Ultra Tax CS 2011 Tax Software
Thomson/Reuters Tax and Accounting