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Almost 1,500 Millionaires Do Not Pay Income Tax

Comstock/Thinkstock(WASHINGTON) -- At a time when America is borrowing about 40 cents of every dollar it spends because tax revenues cannot keep up with government spending, hundreds of America's wealthiest households are paying no income tax at all.

According to a recently released IRS report, almost 1,500 of America's 230,000 millionaires avoided paying any federal income tax in 2009.

So how did they do it? Were they scamming the system? Evading the IRS? Stashing their cash in elusive off-shore, untraceable bank accounts?

Actually, they were probably donating to charity, investing in local and state government bonds and making most of their money overseas.

Mark Robyn, an economist at the Tax Foundation, said foreign income tax credit avoids the problem of double taxation.

"That generally seems like a pretty acceptable feature of a tax code -- to avoid unfairly taxing people twice for the same income," Robyn said.

But the foreign tax credit could be just one of many reasons that almost 1,500 millionaires are not paying U.S. income tax, Robyn said.

"A lot of factors go into it," he said. "High-income people have lots of income sources that the average person like you or me doesn't really experience."

Millionaires are more likely to qualify for tax deductions, for example, by earning non-taxable income from interest on state and local bonds or donating to charity.

"There are a whole bunch of provisions in the tax code that lower people's taxes," Williams said. "And those disproportionately go to people with higher incomes."

But these millionaires are not the only Americans skipping out on federal income tax. A full 46 percent of the population pays zero income tax. The vast majority of these income-tax-free households have low incomes and qualify for child tax credits.

Income tax is a small slice of the complex tax pie, however. Even those that don't pay it are still on the hook for payroll tax, which funds Medicare and Social Security, excise taxes on gasoline, cigarettes and alcohol, and sales tax.

While most lawmakers have said they support reforming this complicated tax puzzle, exactly how to change the tax code is highly disputed.

GOP presidential candidate Michele Bachmann, a former IRS tax attorney, said she would revamp the tax code if elected by lowering overall tax rates and getting "rid of all the deductions" so that more people paid into the system.

Copyright 2011 ABC News Radio

ABC News Radio