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May 2023 | Vol. 12 / No. 11
PRICES & SPENDING

Four personal tax liabilities trends that have emerged from recent tax legislation

By Aaron Cobet and Kristen Thiel

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Have recent tax benefits meant more money in your bank account? In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), and, in 2020, Congress passed the COVID-19 pandemic relief acts, directly affecting the personal tax liabilities of many Americans. Personal tax liabilities are the amount individuals owe to the Internal Revenue Service (IRS).1

The Bureau of Labor Statistics (BLS) provides information both on the spending patterns of U.S. consumers and on the individual factors that affect their abilities to spend. Generally, the main factors include annual income and personal tax liabilities.2 Both factors are important for consumer wellbeing and may be affected by economic events or policies.3 This Beyond the Numbers explains how personal tax liabilities were affected by the TCJA and the COVID-19 pandemic relief acts of 2020 using four charts. It highlights noteworthy personal tax liability trends for specific demographic groups from 2013 to 2020.

Tax Cuts and Jobs Act (TCJA)

The 2017 TCJA changed the tax code regulating individual income tax liabilities with the stated purpose of giving families tax relief. The TCJA

  • nearly doubled the standard deduction, reducing the amount of income on which you’re taxed;

  • expanded child tax credits, giving tax breaks to more people with children; but

  • capped personal exemptions, limiting the amount that can be deducted from an individual’s total income.

Additionally, the TCJA reduced the income tax rates, reduced the tax brackets, and streamlined the filing process by capping itemized deductions.

Economic relief from the COVID-19 pandemic

In March of 2020, Congress passed multiple acts intended to provide broad-based economic relief from the pandemic. The first such congressional act was the Coronavirus Preparedness and Response Supplemental Appropriations Act. This act helped to fund public health initiatives, such as vaccine research and the provision of medical supplies and helped small businesses affected by COVID-19. This act was followed by the Families First Coronavirus Response Act, which provided paid leave for workers and their families who were affected by COVID-19, free COVID-19 testing, and unemployment related to COVID-19. Finally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided stimulus checks and small business loans and expanded unemployment benefits. These acts also increased tax credits for children (giving more money to parents with children under 16), removed income caps for child tax credits (allowing all families to take advantage of the extra money), and issued Economic Impact Payments (stimulus checks). To better understand how these acts provided economic relief, we first examine overall income and tax liability trends from 2013 to 2020, then we look at how they affected particular demographic groups, income groups, age groups, and, finally, compare their effects on renters versus homeowners.

Personal tax liabilities and income before tax liabilities, 2013–20

Before 2020, personal tax liabilities and average annual income trends moved together, both exhibiting strong upward trends through 2019, with a dip in 2017 in current U.S. dollars. Personal tax liabilities rose steadily from 2013 to 2016, with a total increase of 41.1 percent over this period. During this same period, average annual income increased 17.1 percent. In 2017, the year of the TCJA enactment, personal tax liabilities fell by 4.8 percent while average annual income fell by 1.5 percent, likely the result of the TCJA’s policies, such as the doubling of the standard deduction.

However, in 2020, the trends diverged. Personal tax liabilities decreased by 17.5 percent, while the average annual income rose slightly. This was likely the result of the distribution of stimulus checks originated in the CARES Act, one of the pandemic relief acts of 2020.

Even though tax liabilities decreased for all income groups, the lower income groups saw a much larger decrease

Even though personal tax liabilities decreased for all income groups, these decreases were unequally distributed.4 The lowest two income groups had larger percentage declines, compared with the higher income groups. Between 2019 and 2020, personal tax liability of the lowest group decreased by a considerable 828.0 percent and the second lowest income group decreased by 943.5 percent. The higher income groups reduced their personal tax burden by a comparatively small 61.1 percent and an even smaller 4.1 percent for the second highest income group.

These large percent changes were related to the additional tax credits that the lowest two income groups received, which increased their tax refund and lowered their personal tax liabilities further below zero. For example, in 2019, the lowest income group had personal tax liabilities of negative $207, and in 2020, they had personal tax liabilities of negative $1,921, resulting in a $1,714 increase in their tax refund.5

The decline in personal tax liabilities was primarily associated with the rollout of stimulus checks because they were regarded as tax credits, thereby lowering personal tax liabilities. The same trend could not be seen in the highest income group, as many in the highest income group had annual average incomes over the eligibility threshold of $150,000 and did not qualify for stimulus checks. Additionally, before 2020, the lowest two income groups received additional tax credits, which increased their tax refund and lowered their personal tax liabilities further below zero.6 These declines in personal tax liabilities were also accompanied by increases in the average annual income for the four lower groups.

The Tax Cuts and Jobs Act increased personal tax liabilities for consumer units with a reference person over 65

In 2017, personal tax liabilities increased by 25.5 percent for consumer units (CUs) with a reference person 65 years and older because of rising income.7 However, for CUs with a reference person under 65, tax liabilities fell by 7.9 percent.

In 2020, CUs with a reference person 65 years or older showed a large decline in personal tax liabilities of 65.3 percent, in stark contrast to the increase in their 2017 tax liability. The decline in personal tax liabilities for CUs with a reference person under 65 in 2020 were comparatively low at 8.5 percent. Increased rates of retirement and labor force exits from 2020 to 2021 may be the cause of a dramatic decline in taxable income for the 65 or older category. The labor force participation rate for CUs with a reference person 65 or older declined from February of 2020.

Personal tax liabilities increased for renters but fell for homeowners in 2017

In 2017, trends in personal tax liabilities differed for homeowners and renters. While personal tax liabilities for homeowners decreased by 11.3 percent from 2016 to 2017, they increased by 28.7 percent for renters. These different trends occurred despite the TCJA’s capped mortgage itemized deduction (increasing tax liability burden for homeowners) and increased standard deduction (lowering tax liability burden for both homeowners and renters).

The trends of personal tax liabilities for homeowners and renters likely went in different directions due to different income levels. Average annual income for homeowners decreased by 3.8 percent, while the average annual income of renters increased by 5.3 percent, and these changes in income affected personal tax liabilities more than the TCJA’s tax code changes.

Personal tax liabilities declined for renters and homeowners in 2020

In 2020, personal tax liabilities decreased for both groups. However, the percentage decline for renters exceeded that of homeowners. For renters, personal tax liabilities declined by 31.8 percent, compared with 16.6 percent for homeowners.

This was likely due to the different income levels of homeowners versus renters. Even though homeowners’ average annual income decreased by 0.3 percent, while the average annual income of renters increased by 4.1 percent, homeowners still had a sizably larger average annual income before tax liabilities ($100,004) to that of renters ($54,222) in 2020. Being ineligible for stimulus checks from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Coronavirus Response and Consolidated Appropriations Acts because of income thresholds may have been a factor for why homeowners did not see a similar percentage decrease in personal tax liabilities compared with that of renters.8

Conclusion

The TCJA of 2017 and the pandemic relief acts of 2020 had profound impacts on personal tax liabilities. CUs with a reference person 65 and over experienced greater tax burden relief than younger respondents in both 2017 and 2020. Additionally, the acts affected homeowners and renters differently. In 2017, renters experienced an increase in tax liabilities, while homeowners experienced a decline. By contrast, in 2020, both groups experienced declines, but the decline of the renters was almost double that of homeowners. For most Americans, the 2020 pandemic relief acts led to more profound personal tax relief than the 2017 TCJA did.

This Beyond the Numbers article was prepared by Aaron Cobet and Kristen Thiel, senior economists in the Division of Consumer Expenditure Surveys, U.S. Bureau of Labor Statistics. Email: Thiel.Kristen@bls.gov; Cobet.Aaron@bls.gov; telephone: (202) 691-6900.

If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services. This article is in the public domain and may be reproduced without permission.

Suggested citation:

Aaron Cobet and Kristen Thiel, “Four personal tax liabilities trends that have emerged from recent tax legislation,” Beyond the Numbers: Prices & Spending, vol. 12, no. 11 (U.S. Bureau of Labor Statistics, May 2023), https://www.bls.gov/opub/btn/volume-12/four-personal-tax-trends.htm

1 The IRS defines the amount of tax that must be paid as “tax liabilities.” Taxpayers meet (or pay) their federal income tax liability through withholding, estimated tax payments, and payments made with the tax forms they file with the government. For more, see the IRS glossary.

2 Since 2013, income tax data have been estimated using a program called TAXSIM, developed by the National Bureau of Economic Research. Note that TAXSIM produces estimates of personal tax liabilities. In other words, the CE program estimates what CUs are supposed to pay according to their income tax bracket, which can differ from what they pay. The TAXSIM program estimates federal, state, and local income tax liabilities using sources of income and CU characteristics as reported in the CE. For more information, see Improving data quality in Consumer Expenditure Survey with TAXSIM.

BLS uses four main steps to estimate income tax liabilities. First, BLS divides CUs into tax units, which are families or individuals who prepare their tax returns. Second, BLS prepares the income data for each tax unit. Third, BLS runs TAXSIM to estimate tax liabilities for tax units. Fourth, BLS sums tax liabilities for tax units into tax liabilities for CUs. For more information about how BLS estimates tax liabilities, see "TAXSIM Related files at the NBER."

3 For more information on the CE seminar and its methods, see the Handbook of Methods.

4 In this Beyond the Numbers, some sections present the data by quintiles of income before tax liabilities. The quintiles are computed by sorting Consumer Units (CU) into groups from lowest to highest income before tax liabilities. Each CU has an associated weight assigned to it before the sorting, where the weight equals the number of CUs in the U.S. population that the sample unit represents. The weights are then summed cumulatively. The quintiles are created by dividing all CUs into five groups based on that cumulative weight, so that the number of units represented in the post-weighted sample are approximately equal.

5 A negative tax liability is the same as tax refund in that the tax payer receives money from the government.

6 An amount of money that taxpayers can subtract from the income tax liabilities that they owe.

7 A CU is made up of either: (1) all members of a particular household who are related by blood, marriage, adoption, or other legal arrangements; (2) a person living alone or sharing a household with others or living as a roomer in a private home or lodging house or in permanent living quarters in a hotel or motel, but who is financially independent; or (3) two or more persons living together who use their income to make joint expenditure decisions. Financial independence is determined by the three major expense categories: housing, food, and other living expenses. To be considered financially independent, at least two of the three major expense categories must be provided entirely, or in part, by the respondent.

8 Economic Impact Payments eligibility, or stimulus checks eligibility, depended on adjusted gross income (AGI). This was capped at $160,000 for a married couple filing jointly and $80,000 for an individual filing.

Publish Date: Thursday, May 25, 2023