ABC has an article on their website titled, “They Earn $200,000 and Pay No Taxes: Find Out How These Rich Folks Avoided Paying Any Income Taxes.” 

The title is provocative and seems to be an attempt to appeal to a “class warfare” or “class jealousy” mindset.  What can be more unfair than wealthy people getting away with paying no taxes while the rest of us are stuck paying our fair share?

However, as I read through the article I discovered it’s all bark and no bite.

Here’s the story in a nutshell.  Each year the IRS releases aggregated data about federal tax return filings.  In 2005 (the most recent data available) there were nearly 7,400 returns that showed adjusted gross income (”AGI”) greater than $200,000 but reported no tax liability. 

How can someone earn $200,000 and have no federal tax liability? 

Two ways, according to the article.  First, in response to Hurricane Katrina Congress made rule changes to encourage charitable giving during the last few months of 2005.  The 50%-of-AGI limit on charitable deductions and the overall limit on itemized deductions was lifted for charitable donations made between August 27, 2005 and January 1, 2006. 

Second, in 2004 Congress began allowing taxpayers to claim a full, 100% credit for foreign taxes paid against the Alternative Minimum Tax.  Previously the credit had been limited to 90% of federal tax liability.

To sum up, there are a few thousand wealthy people that, in response to law changes made by Congress, decided to increase their charitable giving in latter 2005 or were allowed a full 100% credit (instead of the previous 90% credit) for foreign taxes paid.

It’s hardly the kind of unfairness that leads to revolution, or even hastily written letters to Congressmen.  As hard as I try, I just can’t imagine Patrick Henry getting upset about laws that encourage charitable giving.  And I did try.

There is a long list of things in our creaky old tax code that one could rightfully complain about.  Laws that encourage charitable giving or allow a credit for foreign taxes paid are not at the top of that list.