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397 Earned at Least $200,000 in 1989 but Paid No Tax

November 19, 1991

WASHINGTON (AP) _ Being rich and avoiding federal income tax is not as easy as it used to be.

But 397 couples and individuals, with incomes of $200,000 or more, found a way.

That’s how many high-income earners showed no tax liability on returns filed in 1989, the Internal Revenue Service said in a report Tuesday.

The average income for this group: $575,000.

An additional 4,192 high-income tax return filers paid less than 5 percent of their earnings in federal taxes; 8,495 paid 5 percent to 10 percent, and 19,114 paid 10 percent to 15 percent.

All told, 32,198 couples and individuals with annual incomes of $200,000 or more paid less than 15 percent of their earnings in federal taxes. On the other hand, more than 80 percent of the 737,659 high-income filers paid 20 percent to 30 percent.

The IRS found 2,377 returns reported incomes of $100,000 to $200,000 but paying no tax.

The 397 of the richest Americans who paid no tax on returns filed in 1989 compares with 472 in 1988 and 595 in 1987. The IRS has been reporting on high- income non-taxpayers since 1977, when there were 53. The peak year was in 1986, when 613 were reported.

In general, the number of filers able to avoid federal tax has declined while the number of $200,000-plus earners has increased steadily. On returns filed in 1987, 529,460 reported income of $200,000 or more; within two years the number had increased by 40 percent.

That is no accident. Laws enacted in 1981 and 1986 slashed tax rates dramatically on top earners while reducing their ability to shelter income from taxation.

But the new report shows that some shelter opportunities still survive. The biggest: tax-exempt interest, most of it from city and state bonds. The IRS said 184 of the high-income non-taxpayers reported tax-free interest of $98.6 million on returns filed in 1989. That was an average of $536,000 apiece.

So how did 397 couples and individuals earn $200,000 or more but pay no tax?

-Farming losses: 34 reported losses totaling $16 million - an average of $470,000. In general, such losses can shield other income from taxation.

-Partnership losses: 177 reported $106 million of net losses, an average of $598,000, from investments in partnerships and closely held corporations.

-Home mortgage interest: 182 deducted interest totaling almost $17 million, an average of more than $92,000.

-Other interest: 189 deducted interest exceeding $23 million, averaging $124,000.

-Charitable contributions: 226 reported contributions of $28 million, an average of $125,000.

-Tax credits: 105 claimed credits totaling $24 million, a dollar-for-dollar tax reduction averaging $228,000. Most credits were business-related.

-Job-related moving expenses: 4 claimed expenses totaling $59,000.

-Medical-expense deductions: 37 claimed deductions of $7.3 million, averaging $197,000.

-Casualty losses: 22 claimed $17 million worth of losses from theft, fire and other casualties - an average of $776,000 per return.

Without a special levy known as the alternative minimum tax, the number of non-taxpaying people earning at least $200,000 would have been more than twice as high - 866 - the report said. The levy was enacted specifically to catch top earners who otherwise would be able to ″zero out″ of any tax liability through the use of deductions, credits and business losses.

The IRS said 183 of the untaxed $200,000-plus earners reported capital gains, or profits from the sale of investments, totaling nearly $71 million - or $386,000 each. By comparison, 223 had salaries and wages totaling just under $55 million, an average of $246,000.

At least one rich filer received unemployment compensation during the year; 96 had nontaxable Social Security benefits. Rental property produced income for 85 totaling $8.7 million.

Only 20 percent of the rich non-taxpayers had net income from a business or profession, but that totaled $12.3 million. An additional 53 reported net losses totaling $10.7 million. Pensions provided $5.8 million of income for 85 couples and individuals.

All the figures were taken from tax returns as they were received by the IRS and are subject to change if the returns are audited.