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The Winners and Losers of the U.S. Income Tax Code

Written By: Christine Dantz

There are always winners and losers when it comes to the U.S. income tax code system, which is complicated and does discriminate. Childless couples, non-custodial parents, along with a large chunk of single-working poor and middle class taxpayers, pay an unequal share of income taxes. Working poor families rely on the few credits they are eligible for under federal programs; nonetheless, the programs often come under fire and scrutiny when discussing budget and entitlements. Elected officials are quick to talk about high tax rates, however, many conveniently leave off the real problem-credits, deductions, and other ways individuals reduce their tax liability that negate those tax rates.

Losers-Anyone with Nothing to Deduct

If you aren't married, rent your home, are childless, have no investments, and don't pay student loan interest, congratulations, you are on the losers list. To put it in perspective, there's a good chance you pay more income taxes than your boss does. That's right, the jokes on you.
Some of the common ways to reduce adjusted gross income (AGI) and total tax liability include:

  • Itemized deduction- this honey pot allows deductions for previous local and state taxes; medical expenses that exceed 7.5 percent of AGI; mortgage loan interest; car, boat, and other motor vehicle registration fees; expenses associated with employment such as travel, mileage, and uniform expenses; charitable contributions; losses due to casualty; the fees charged to prepare an income tax return
  • Education credits-two credits are available for qualifying deductions, both the American Opportunity Credit and Lifetime Learning Credit reduce tax, but the American Opportunity Credit has a refundable portion
  • Along with credit for paying for college, filers can deduct interest paid on qualifying student loans, both for themselves and dependents
  • Certain retirement contributions
  • Child and dependent care expenses-this includes adult daycare expenses
  • Credits for green energy
  • Earned Income Tax Credit (EITC)-a federal tax refund for low-income working families and single parents, as well as single wage earners with extremely low earned income
  • Filers don't need to itemize to get a deduction for charitable contributions, they can deduct any amount on the federal tax return; this includes expenses related to charity work
  • The Child Tax Credit (CTC), a credit for raising children under 18
  • Costs for job hunting (unless it's your first job); this includes transportation costs, employment agency fees, and resume-related expenses
  • Job-related relocation expenses

These are only some of the thousands of ways to save money on income taxes. It also explains why someone with more than one home, vehicle, and retirement account pays less in taxes. A large annual income leads to more spending, which in return, allows many unlimited income tax deductions.
Helping Parents

America's poor, yet employed, parents work hard, but don't earn enough to afford the luxuries that also make great tax deductions. Raising a child in America isn't cheap. Today's economy requires two parents working full-time to meet their children's growing needs. The prices of health care, childcare, after-school care, and education have increased, while wages have remained stagnant.

The EITC, CTC, and Child and Dependent Care Credit help parents offset those costs. In 2011, nearly 30 million low and moderate-income families received the EITC. Together, research shows that children in families receiving the credits do better in school, many go to college, and earn higher wages as adults than their parents did.

Helping People Without Children

President Obama's tax proposal would increase the EITC to include working poor individuals and couples without children. Short of wage increases to help pull this large group of Americans out of poverty, this is the only way to help this tax bracket.

However, before jumping on the party line, the Democratic leader's call to increase the credit for childless workers is bipartisan. Glenn Hubbard, former economic advisor for George W. Bush wrote:

"Increasing the credit for childless workers to an amount closer to that for families with children would augment the direct work incentive and help counter poverty among the working poor."

If you were to dig deeper into the complicated world of income tax code, you would find dozens of loopholes that help the wealthy and don't apply to the working poor. Increasing the EITC to include more childless workers and expand it to those eligible working parents with moderate incomes will help the nation reduce the number of Americans living in poverty.

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