Income Tax Statistics for Sample Families, 2003

Leonard E. Burman, Mohammed Adeel Saleem

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We are often asked about how much income tax a family would pay in a given situation. Table 1 shows total taxes that would be owed as well as the average tax rate for single individuals and families at different income levels.1 Table 2 shows the statutory income tax rate (the tax bracket) and the effective marginal tax rate for the same families. The tables assume a very simplified scenario: The tax filers are nonelderly, not blind, and all children are potentially eligible for dependency exemptions, the earned income tax credit, and the child credit (subject to income limits); the filer claims no other credits; income is comprised of earnings, capital gains, and dividends, where the fraction of income in capital gains and dividends reflects the average for each income group; itemized deductions equal 19 percent of income and the taxpayer itemizes if itemized deductions exceed the standard deduction; the filer has no other deductions or income. (See notes to tables for detailed list of assumptions.)

Table 1 shows that income tax liability can be negative for many families with children because of the refundable earned income tax credit and the child tax credit. So-called "refundable tax credits" are paid out as refunds even if the tax filer has no income tax liability. Both of these credits are designed to reward work and assist families with children. Up to a point, families can get larger credits the more they earn. (There is also a small refundable earned income tax credit for single people, but it applies to lower income levels than are shown in the table.)

At higher income levels, income tax liability trends upward because tax rates are progressive with income. Average tax liability is always significantly lower than the top statutory tax bracket of 35 percent — even for taxpayers with $1 million of income. Their average tax rate is about 24 percent. For low- and moderate-income families, having children reduces average tax rates because of dependent exemptions, child tax credits (for all but the lowest-income families), and, for low-income families, the earned income tax credit. At income s above $110,000 ($75,000 for heads of household and singles), the child tax credit starts to phase out; it is phased out entirely at an income of $129,001 for a family with one child, $149,001 for a family with two children, and so on. In addition, personal exemptions are phased out for high-income families, and are not available at all for families subject to the alternative minimum tax. As a result, high-income families can owe the same tax with six children as they would with none.

Note: This report is available in its entirety in the Portable Document Format (PDF).

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