May 29 (Bloomberg) -- The percentage of U.S. taxpayers reporting adjusted gross income exceeding $200,000 who paid no U.S. income taxes increased in 2009 to 0.53 percent from 0.51 percent, meaning that one in 189 high earners avoided taxation, an Internal Revenue Service study found.
The filers reported tax-exempt interest along with deductible charitable contributions, medical expenses and other items to legally reduce their taxable income. They avoid the alternative minimum tax, which was created in 1969 in response to a report that 155 people earned $200,000 and paid nothing in taxes.
“High-income returns are more often nontaxable as a result of a combination of reasons, none of which, by itself, would result in nontaxability,” the IRS wrote in a report released May 25.
The annual report comes amid a debate over the fairness of the U.S. tax code and particularly how it applies to those at the top of the income scale. President Barack Obama has proposed the so-called Buffett rule, which would impose a 30 percent minimum tax on high earners; a congressional proposal implementing the rule set the threshold for the 30 percent tax at $2 million.
The number of high-income households paying no taxes is an indicator of the low rates paid by many high earners, said Matt Gardner, executive director of the Institute on Taxation and Economic Policy, a Washington research group that supports a more progressive tax system.
“When high-income people find ways to avoid paying any income tax at all, they’re frequently doing so through tax breaks that some members of Congress and President Obama have sensibly sought to reform,” he said.
Including the Buffett rule and other proposals, Obama has supported limits on deductions and the tax exemption for municipal bond interest that would make it tougher for high earners to avoid all taxes.
The IRS uses two definitions of income and two of taxation in its calculations, resulting in four ways of measuring the percentage of Americans with high incomes and no taxes. In 2009, the percentage of nontaxable returns rose in three of the four measures and hit a record high, stretching back to 1977.
In 2009, 10,080 households reported adjusted gross income of at least $200,000 annually, or 0.26 percent of high earners, who paid no income taxes in the U.S. or to other countries. Under U.S. tax law, citizens owe U.S. taxes for income they earn around the world and receive tax credits for payments to other governments.
Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing.
Overall, about half of U.S. tax filers pay no income taxes, and they are concentrated among lower and middle-income households. For them, tax breaks such as the child tax credit and the earned income tax credit combine with the standard deduction and personal exemptions to eliminate tax liability.
The number and percentage of U.S. households with income exceeding $200,000 declined from 2008 to 2009. In 2009, 3.9 million households, or 2.8 percent of the population, had adjusted gross income at that level. That was down from 4.4 million and 3.1 percent in 2008.
To contact the reporter on this story: Richard Rubin in Washington at email@example.com
To contact the editor responsible for this story: Jodi Schneider at firstname.lastname@example.org