It’s a holiday week, so I’m re-publishing popular blog posts from the past. This is one of my favorites, telling the story about the time I was giving a presentation and one of the audience members started arguing with me that a loss that produces negative taxable income would result in a “negative tax liability” as if the tax brackets also run in reverse.
Originally published January 28, 2016
At a presentation I was giving about taxes a few years ago, I got into a mild argument with an audience member on the subject of having negative taxable income.
The audience member was certain that having enough deductions and exemptions to push your taxable income below $0 resulted in the government “giving you more money.”
I went to the whiteboard and detailed how taxes are calculated, to show that this simply isn’t the case. I think the audience member understood, though I’m not certain.
As I’ve written before, refunds are determined by a combination of tax withholdings and tax credits compared to your tax liability.
Your taxable income cannot drop below $0. If your taxable income is $0, your tax liability is $0.
The tax brackets stop at $0 of taxable income — having taxable income below $0 doesn’t mean your tax liability is a negative number or that the government “pays you more money.”
Joe has adjusted gross income of $20,000. He has 2 kids and files as head of household. His standard deduction (using 2015 numbers) is $9,250. His exemptions total $12,000 ($4,000 x 3 exemptions, one for Joe and one for each of his kids).
The total of his standard deduction and personal exemptions is $21,250, technically giving him taxable income of a negative $1,250.
On his tax return, Joe will show $0 as his taxable income, and $0 of tax owed.
His refund will depend on how much tax was withheld from his pay during the year, and the credits he qualifies for (likely the earned income credit and the additional child tax credit).
The fact that his taxable income was technically a negative number does not make his tax liability a negative number.