Individual income tax returns, 2002

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

Total income tax fell 10.2 percent to $797.0 billion for 2002 (Figure A). This is the second successive year that total income tax declined. The decline in total income tax reflects the combined effects of a decline in taxable income, and the reduction in tax rates, under EGTRRA, which lowered marginal rates above the 15-percent rate bracket and introduced a new 10-percent regular tax rate bracket (see the Changes in Law Section for further details).

Average AGI reported on 2002 individual income tax returns was $46,385, and average taxable income was $40,050 [8]. These amounts represent declines of 2.1 percent and 2.3 percent, respectively, from the 2001 amounts of $47,373 (average AGI) and $40,975 (average taxable income).

Figure F shows that the average tax rate for 2002 (i.e., total income tax divided by AGI reported on all returns, taxable and nontaxable) was 13.2 percent, a decrease of 1.2 percentage points from 14.4 percent for 2001. This lower average tax rate was reflected in all of the income-size classes for AGI of less than $1.5 million, with declines in the average tax rate ranging from 0.1 percent to 1.3 percent (in the $30,000 under $50,000 class). The average tax rate was unchanged for returns with AGI between $1.5 million and $2.0 million. The average tax rate increased, however, for all of the income-size brackets of returns reporting more than $2 million of AGI. The higher average tax rates for taxpayers reporting over $2 million of AGI was primarily attributable to the 38.3-percent reduction in the amount of long-term capital gain less loss by those taxpayers for 2002. This income receives a special lower capital gain rate that lowered the average tax rate for taxpayers in the income classes in previous years. Figure F also shows that the number of returns declined in all AGI classes above $100,000.

Tax Credits

Statistics for tax credits, including the earned income credit (EIC), are shown in Tables 2 and 4 and summarized in Figures G and H. For 2002, total tax credits (excluding the "refundable" portion of the child tax credit, the EIC, and any EIC used to offset any other taxes) decreased 12.6 percent to $39.9 billion (Figure G). Nearly 9.0 percent of the decrease in tax credits was attributable to the elimination of the rate reduction credit. The benefits, which were reflected in the rate reduction credit of 2001, were included for 2002 in the new 10-percent income tax bracket. Tax Year 2002 was the first year for the new retirement savings contribution credit, which was used by 5.3 million taxpayers and amounted to almost $1.1 billion. This credit allowed the taxpayer to take up to $1,000 for qualified retirement savings contributions (see the Changes" in Law section of this article).

[FIGURE H OMITTED]

For 2002, all credits decreased except for the general business credit, which increased 5.2 percent. The child tax credit decreased 4.0 percent to $21.5 billion and was the largest credit for the fifth consecutive year, accounting for 54.0 percent of total tax credits reported for 2002. The decline partially reflects the introduction of the 10-percent tax rate bracket, which resulted in lower taxes. The refundable portion of the child tax credit (the "additional child tax credit"), however, increased 28.4 percent to $6.4 billion. The total child tax credit increased 1.9 percent to $27.9 billion. The foreign tax credit, the second largest credit for 2002, decreased 5.1 percent to $5.9 billion. The education credits that were first introduced in 1998 were taken by nearly 6.5 million taxpayers and totaled almost $4.9 billion, a decrease of 5.3 percent over 2001. The child care credit and the earned income credit (used to offset income tax before credits) fell for 2002 by 0.5 percent and 24.2 percent, respectively. The amount of the EIC used to offset income tax before credits declined, partially due to lower taxes with the introduction of a 10-percent rate.