For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20048 ------------------------------------------------------------------------------ Order Code RS20048 Updated August 27, 2003 CRS Report for Congress Received through the CRS Web Federal Individual Income Tax Thresholds for 2003 Gregg A. Esenwein Specialist in Public Finance Government and Finance Division Summary One commonly accepted principal of tax fairness reflected in the U.S. tax code is that families at the low end of the income spectrum, especially those near the poverty threshold, should not be subject to the federal income tax. Since the major components of the federal income tax that govern these tax thresholds are indexed for inflation, nominal dollar federal individual income tax thresholds change every year.1 This report presents the tax thresholds for various families for tax year 2003. This report is updated on an annual basis. The major structural components of the tax code which influence the income levels at which various households become subject to the federal income tax include the standard deduction, the personal exemption, the child tax credit, and the earned income tax credit (EITC); each of these items increases the level at which a family becomes taxable.2 Consider the case of a married couple with one dependent child under the age of 17. In 2003, the standard deduction for a married couple filing a joint return is $9,500, each personal exemption is worth $3,050, and the child tax credit is $1,000 for each qualifying child. This family would reach the basic income tax threshold for their filing status and family size at an income level of $18,650 (standard deduction of $9,500 plus three personal exemptions of $3,050 each). Income under this amount would not be subject to tax while any income over this amount would be taxed. 1 For more information on the structural components of the federal income tax and indexation see CRS Report RL30007, Individual Income Tax Rates: 2003, by Gregg A. Esenwein. July 2003. 2 The child and dependent care tax credit might also influence a household's federal income tax threshold but it is not addressed in this report because it is not widely used by households at the lowest end of the income spectrum. Congressional Research Service ~ The Library of Congress CRS-2 Although income over this amount is subject to tax, the child tax credit offset this couple's first $1,000 of income tax liability . At this point the EITC would come into play. The maximum EITC for 2003 for families with one child is $2,547. The maximum credit begins to phase out for families filing joint returns with incomes above $14,730 and is reduced to zero for families whose incomes exceed $30,666. The income tax threshold for the family in this example is the point at which the EITC is just enough to offset any pre-EITC income tax liability so that the net tax liability of the family is zero. In the case of a couple with one dependent child filing a joint return the income level is $29,889. At this income level, the family's pre- EITC income tax liability is $124 and the family's EITC is also $124. The two offset each other and the family does not have any net income tax liability At incomes below the income tax threshold, the EITC is large enough that it more than offsets income tax liability and the family gets a refund for the excess (subject to certain restrictions). At income levels above the income tax threshold, the EITC has been reduced to the point that it no longer fully offsets the entire income tax liability and the family ends up with a net income tax liability. The income tax thresholds for selected households in 2003 are shown in the Table 1. Table 1. Federal Individual Income Tax Thresholds for 2003 Single Individuals (no children) Not eligible for the EITC $7,800 Eligible for EITC $9,290 Married Couples No children (not eligible for the EITC) $15,600 One child $29,889 Two children $39,700 Three children $49,417 Four children $59,133 Heads of Households One child $26,489 Two children $33,326 Three children $42,533 Four children $52,250 Source: CRS. Note: Assumes all children are eligible for the child tax credit. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20048