Order Code RS22337
November 29, 2005
CRS Report for Congress
Received through the CRS Web
Federal Income Tax Thresholds for Selected
Years: 1996 Through 2006
Gregg Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
One principle of tax fairness or equity accepted by many is that households at the
low end of the income spectrum, especially those near the poverty threshold, should not
be subject to the federal income tax. Federal income tax thresholds are high enough
that, with the exception of single taxpayers, the equity principle of exempting poverty
level households from income taxation has been achieved over time. The introduction
and subsequent increase in the child tax credit, however, have significantly increased the
income tax thresholds for households with children. For households with children, the
income tax thresholds are now substantially higher than the comparable poverty
thresholds. In fact, the child tax credit represents a departure from past policy practices
because it is not designed primarily as a means of differentiating between families of
different size at or near the poverty threshold, but rather is designed to provide general
tax reductions to middle and upper income taxpayers with dependent children under the
age of 17.
The recent increases in the child tax credit are scheduled to sunset (expire) in 2011.
As a result, it is likely that Congress will revisit the issue of the child tax credit because,
absent legislative action, the credit will decline from its current law level of $1,000 to
$500 in 2011.
This report will be updated as new data become available or as events warrant.
The major structural components of the income tax code which influence the income
levels at which households become subject to 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 income level at which an individual or family
incurs an out-of-pocket federal income tax liability.1
1 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

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For instance, consider the case of a married couple with one dependent child under
the age of 17. In 2006, the standard deduction for a married couple filing a joint return
will be $10,300, each personal exemption will be worth $3,300, and the child tax credit
will be $1,000. This family would reach the basic income tax threshold (the point at
which they have an actual out-of-pocket tax payment) for their filing status and family
size at an income level of $20,200 (standard deduction of $10,300 plus three personal
exemptions of $3,300 each). Income under this amount would not be subject to tax while
any income over this amount would be taxed.
Although income over $20,200 would be subject to tax, the child tax credit would
offset the first $1,000 of this couple’s income tax liability. At this taxable income level
the marginal tax rate is 10%. That means that tax on income up to $30,200 would be
offset by the $1,000 child tax credit.

At this point, the EITC would come into play. The maximum EITC for 2006 for
families with one child will be $2,747. The maximum credit will be phased out for
families filing joint returns with incomes above $16,810, and will be reduced to zero for
families whose incomes exceeded $34,001. The income tax threshold for the family in
this example will be 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, in 2006, will be
$32,537. At this income level, the family’s pre-EITC (and post child tax credit) income
tax liability would be $233 and the family’s EITC would also be $233. The two would
offset each other, and the family would not have any net income tax liability.
The federal income tax thresholds for singles, joint returns, and head of households
for selected years between 1996 and 2006 are shown in Table 1. (The derivation of these
values is detailed in the appendix.)
The data in Table 1 show that the biggest increases in income tax thresholds, in both
dollar and percentage terms, over the 1996 to 2006 period occurred for households who
had dependent children under the age of 17. For example, married couples with children
experienced increases in their income tax thresholds ranging from 64% for married
couples with one child to140% for married couples with four children. The increase in
the income tax thresholds for head of households between 1996 and 2006 ranged from
55% for households with one child to123% for households with four children.
The increases in income tax thresholds for single individuals and married couples
without children were more moderate than those experienced by households with
children. Tax thresholds for single individuals only increased by 33% between 1996 and
2006, while tax thresholds for married couples with no children increased by 43%.
Income tax thresholds change over time because of two factors. First, they change
because of the annual inflation adjustments to personal exemptions, standard deductions,
tax rate brackets, and the EITC. Second, they change because of legislative changes to
the tax system.

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Table 1. Federal Income Tax Thresholds: 1996 to 2006
1996
2000
2002
2004
2005
2006
Single Individuals
Eligible for EITC
$7,547
$8,276
$9,156
$9,484
$9,739
$10,045
Not eligible for EITC
$6,550
$7,200
$7,700
$7,950
$8,200
$8,450
Married Couples
No Children
$11,800
$12,950
$13,850
$15,900
$16,400
$16,900
One Child
$19,883
$23,380
$27,370
$30,435
$31,709
$32,537
Two Children
$23,672
$28,683
$33,210
$40,200
$41,000
$41,867
Three Children
$24,732
$31,350
$38,850
$49,967
$50,866
$51,833
Four Children
$25,793
$37,483
$45,850
$59,733
$60,733
$61,800
Head of Households
One Child
$18,260
$21,589
$24,857
$26,988
$27,553
$28,321
Two Children
$22,277
$27,143
$30,704
$33,939
$34,620
$35,524
Three Children
$23,336
$29,695
$34,233
$42,953
$43,587
$44,333
Four Children
$24,400
$33,783
$41,233
$52,713
$53,453
$54,300
Calculations by CRS. Assumes all children qualify for the child tax credit.
The relatively large changes in the tax thresholds for households with children can
be traced to three main legislative changes that occurred over the 1996 to 2006 time
period. These changes included establishment and subsequent increases in the child tax
credit, an increase in the size of the standard deduction for joint returns, and an increase
in the width of the 15% tax bracket for joint returns.2
The Taxpayer Relief Act of 1997 established the child tax credit. Initially, the credit
was set at $500 for each qualifying child under the age of 17. Additional legislative
changes under the Economic Tax Relief and Reconciliation Act of 2001 increased the
child tax credit to $1,000. The 2001 Act also increased the width of the 15% tax bracket
and increased the standard deduction for joint returns. Although these changes were
originally scheduled to be phased in over a number of years, subsequent legislation in
2003 and 2004 accelerated implementation and made these provisions effective in full
through 2010.
The end result of these legislative actions has been a significant increase in the
income tax thresholds for households with children. Economic theory does not provide
2 For more information on the child tax credit see: CRS Report RS21860, The Child Tax Credit,
by Gregg Esenwein.

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an answer to the question of how the costs of child rearing should be accounted for under
an income tax. However, one principle of tax fairness or equity accepted by many is that
households at the low end of the income spectrum, especially those near the poverty
threshold, should not be subject to the federal income tax. It has been argued that given
the precarious financial position of these households, they should not be compelled to pay
federal income tax, an action that would further reduce their level of subsistence.
The Tax Reform Act of 1986 explicitly cited this principle of eliminating income tax
burdens for families with incomes near the poverty level as the reason for increasing the
dollar amounts of standard deductions and personal exemptions. This act increased the
value of personal exemptions and raised the standard deductions for joint returns and head
of households such that, in combination with the EITC, the income tax thresholds for
these taxpayers would be above their respective poverty thresholds.
Given this principle, one can compare income tax thresholds to poverty thresholds
to see if this equity goal has been achieved over time. Table 2 shows the 1996 and 2004
poverty thresholds for singles and households with children.3
Comparisons of the data in these two tables reveals several trends. First, the income
tax threshold for single individuals was below their respective poverty threshold in both
1996 and 2004.4
On the other hand, the tax threshold for married couples without children exceeded
their respective poverty thresholds in both 1996 and 2004. In addition, the amount by
which their tax threshold exceeded their poverty threshold increased over the period. In
1996, the tax threshold for married couples without children exceeded their poverty
threshold by about 12%, but by 2004 the difference had increased to 33%.
A more significant trend, however, occurred for families with children. In 1996, the
federal income tax thresholds for families with children exceeded their respective poverty
thresholds by relatively comfortable margins. By 2004, these margins had increased
substantially, especially for larger families. For example, in 1996, the income tax
threshold for a married couple with four children was $25,763, while the poverty
threshold for this same size/type family was $20,965. So the tax threshold was about 23%
higher than the poverty threshold. By 2004, the income tax threshold for this family had
increased to $61,800, while the poverty threshold had only increased to $25,241. In this
instance, the income tax threshold increased to 145% of the poverty threshold. The
income tax thresholds for head of households show similarly large increases relative to
their corresponding poverty levels.
3 2004 represents the most recent poverty threshold data available.
4 The 1986 act explicitly excluded single individuals from the goal of establishing tax thresholds
in excess of their respective poverty thresholds. Two reasons were given for excluding singles.
First, increasing the standard deduction for singles would have introduced larger marriage tax
penalties into the tax system. Second, it was felt that the income level of singles did not represent
a good measure of whether or not the living conditions of these taxpayers was impoverished.
For more information see: Joint Committee on Taxation, General Explanation of the Tax Reform
Act of 1986, May 1987, p. 16.

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Table 2. Poverty Thresholds: 1996 and 2004
1996
2004
Single Individual
$8,163
$9,827
Two Adults
-No children
$10,564
$12,649
-One child
$12,629
$15,205
-Two children
$15,911
$19,157
-Three children
$18,725
$22,543
-Four children
$20,965
$25,241
One Adult
-One child
$10,815
$13,020
-Two children
$12,641
$15,219
-Three children
$15,967
$19,223
-Four children
$18,438
$22,199
Source: U.S. Census Bureau.
As these tables demonstrate, with the exception of single taxpayers, the equity
principle of exempting poverty level households from income taxation has been achieved
over time. In addition, however, there have been significant increases in the tax thresholds
for households with children. These changes in the relationship between income tax and
poverty thresholds for households with children can be attributed primarily to the
introduction and subsequent increases in the child tax credit. In fact, the child tax credit
represents a departure from past policy practices because it is not designed primarily as
a means of differentiating between families of different size at or near the poverty
threshold, but rather is designed to provide general tax reductions to middle and upper
income taxpayers with dependent children under the age of 17.
The recent increases in the child tax credit are scheduled to sunset (expire) in 2011.
As a result, it is likely that Congress will revisit the issue of the child tax credit because,
absent legislative action, the credit will decline from its current law level of $1,000 to
$500 in 2011.

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APPENDIX
Derivation of Federal Tax Thresholds
(1)
FT = PT - CT - EITC
Where:
FT
=
Final tax liability
PT
=
Pre-tax credit tax liability
CT
=
Child tax credit
EITC =
Earned income tax credit
(2)
PT = B + t(Y - SD - PE - LB)
Where:
B
=
Base tax amount
t
=
Marginal tax rate
Y
=
Income
SD
=
Standard deduction
PE
=
Personal exemptions
LB
=
Marginal tax bracket lower income limit
(3)
CT =NC * CA
Where:
NC
=
Number of qualifying children
CA
=
Child credit amount
(4)
EITC = MC - r(Y- Th)
Where:
MC
=
Maximum credit amount
r
=
Credit phase-out rate
TH
=
Credit phase-out threshold
Combining equations 1, 2, 3, and 4 yields:
(5)
FT = (B + t(Y - SD - PE - LB)) - (QC * CA) - (MC - r(Y - TH))
Setting FT to zero and solving for Y yields:
(6)
Yth = ( tSD + tPE + tLB - B + QC * CA + MC + rTH) / (t +r)
Where:
Yth
=
Federal income tax threshold

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