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How the rich avoid paying federal income tax

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Shannon Stapleton/Reuters/File

(Read caption) US 1040 Individual Income Tax forms are seen in New York.

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Most of the 43 percent of Americans who the Tax Policy Center projects will pay no federal income tax this year make very little money. Some are middle-income households that qualify for enough tax preferences to zero out their tax bills. But more than 70,000 households with income over $200,000 will pay no federal income tax in 2013. How will they do that?

Some have very high medical expenses but the two biggest reasons are linked to their investments: foreign tax credits and tax-exempt bonds.

 TPC’s hit video explains why the 43 percent pay no federal income tax. But for a closer look at why high-income households pay no income tax, it helps to turn to the IRS’s Statistics of Income (SOI) division.

Each year, SOI focuses on two overlapping groups of returns with income over $200,000: those who pay no income tax to the U.S. and those who pay no tax worldwide. 

The first includes people whose U.S. liability is zeroed out by domestic tax preferences combined with foreign tax credits and the exclusion of overseas income taxed abroad. The second includes only those who don’t pay any net income tax at all. The analysis also uses two alternative measures of income to define high-income tax units: adjusted gross income (AGI) and “expanded income,” which adds excluded income such as tax-exempt interest and untaxed Social Security. (The second measure is closer to—but not the same as—the Tax Policy Center’s “expanded cash income.”)

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