Individual income tax returns, 2002

Statistics of Income Bulletin, Fall, 2004 by Michael Parisi, Scott Hollenbeck

Taxpayers filed 130.1 million individual income tax returns for Tax Year (TY) 2002, a slight decrease from the 130.3 million returns filed for Tax Year 2001 (which included some late-filed Tax Year 2000 returns [1]). The adjusted gross income (AGI) reported on these returns totaled just over $6.0 trillion, a 2.2-percent drop from the previous year. This was the second consecutive year that AGI fell. In both years, the decline in AGI reported on all returns occurred for returns with AGI of $200,000 or more. AGI reported on returns with income below $200,000 increased both years. The principal cause of the decline in AGI between 2001 and 2002 was a large decline in net capital gain (less loss), which fell 26.9 percent for 2002. Taxable income also fell for 2002, declining 4.0 percent to $4.1 trillion. Taxable income fell faster than AGI because the amount of exemptions and deductions reported in 2002 increased. The decrease in taxable income, along with a second year of declining tax rates enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), resulted in total income tax falling 10.2 percent to $797.0 billion (see the Changes in Law section of this article). This was the largest percentage decrease since 1958. The average tax rate for all returns also declined for 2002, by 1.2 percentage points, to 13.2 percent of AGI. Income breakdowns reveal that income-size classes containing returns reporting less than $1.5 million of AGI had lower average rates for 2002, the average tax rate was unchanged for returns reporting $1.5 million to $2.0 million of AGI, and the average rates were higher for income-size classes reporting more than $2.0 million of AGI. The higher average rates for these higher-income returns reflect the reduction in capital gains, which are taxed at preferential rates.

Adjusted Gross Income and Selected Sources of Income

As shown in Figure A, adjusted gross income (AGI) dropped 2.2 percent to just over $6.0 trillion for 2002. The component of AGI that contributed most to the decrease in AGI was net capital gain (less loss). As shown in Figure B, $238.8 billion of net capital gain (less loss) were realized for 2002, 26.9 percent less than the previous year. This was less than the amount reported in each of the previous 6 years. The largest component of AGI, salaries and wages, decreased 0.1 percent from $4.57 trillion to $4.56 trillion. This was the first decline in salaries and wages since 1958, when they fell 0.2 percent. Due to the larger declines in other components of AGI, the share of salaries and wages in AGI increased to 75.6 percent of AGI for 2002, up from 74.0 percent for 2001.

There were also significant decreases in other components of AGI. Taxable interest, dividends, and taxable Individual Retirement Account (IRA) distributions fell by 24.8 percent, 13.6 percent, and 6.5 percent, respectively. The decline in taxable interest represented the largest decrease since at least 1945. This large decline in taxable interest reflects interest rates being at or near their lowest levels since 1958 [2].

Some components of AGI, however, increased for 2002. The component with the largest percentage increase for 2002 was unemployment compensation, which increased 60.4 percent to just over $43.1 billion. The number of returns reporting unemployment compensation also increased for 2002 by 17.4 percent to 10.3 million. These increases occurred in conjunction with the unemployment rate rising to 6.0 percent, its highest average annual level since 1993 [3]. Other components of AGI that increased for 2002 included partnership and S corporation net income (less loss) and taxable pensions and annuities, which rose by 5.7 percent and 5.6 percent, respectively.

Losses

Total negative income includes net negative income line items from individual tax returns [4]. Total negative income, i.e., net loss, included in AGI increased 6.8 percent to $270.3 billion for 2002 (Figure C). Much of this loss was related to individual-owned businesses that must report income and loss through individual tax forms. The increases to business or profession net loss, total rental and royalty net loss, net operating loss, and farm net loss combined to account for 70.4 percent of the $17.2billion increase in net loss for 2002 [5]. Net capital loss demonstrated the largest percentage increase, 29.9 percent, to just over $29.8 billion [6].

Statutory Adjustments

Statutory adjustments, which are subtracted from total income in the computation of AGI, increased 27.4 percent to $77.2 billion for 2002 (Figure D). Over one-third of this substantial increase was due in part to two new statutory adjustments, for educator expenses and tuition and fees. The tuition and fees deduction and educator expenses adjustment accounted for $6.2 billion and $0.7 billion, respectively. The largest statutory adjustment was the self-employment tax deduction, representing 24.2 percent of the total. This adjustment increased 3.0 percent to $18.7 billion for 2002. Payments to self-employed retirement (Keogh) plans increased 24.7 percent to $16.4 billion and were the second largest statutory deduction for 2002. The self-employed health insurance deduction increased 28.3 percent to $10.5 billion, maintaining its position as the third largest statutory adjustment for 2002. For 2001, a taxpayer was able to deduct 60 percent of health insurance expenses; for 2002, this was increased to 70 percent. This was only the third year out of the previous 17 years that deductible payments to an IRA increased, rising 27.8 percent to just under $9.5 billion for 2002. This increase reflects a change in law that increased the maximum deductible amount from $2,000 to $3,000 per taxpayer. Also, for 2002, a taxpayer age 50 or older could deduct up to $500 beyond the $3,000, whereas, in previous years the maximum deductible amount was the same regardless of age. The student loan interest deduction increased 64.8 percent for 2002, and an additional 2.2 million taxpayers claimed the deduction for 2002. More taxpayers were eligible for this deduction, due to the law change that increased the income thresholds (see the Changes in Law section of this article).