Who Pays the most Income Tax?
Income taxes are a large part of a high-income earner’s budget. According to Pew Research Center, people with Adjusted Gross Income (AGI) above $250,000 in 2014 accounted for only 2.7% of all taxpayers. However, these individuals collectively paid 51.6% of all individual income taxes. Those with AGI below $50,000 accounted for 62.3% of all individual tax returns filed while only paying 5.7% of total income taxes.
Individual federal income taxes are calculated on a progressive schedule meaning higher tax rates apply as income rises above certain levels. For example, a single individual’s tax bracket increases from 25% to 28% when taxable income reaches $91,151 in 2016. This explains the phrase “the more you make, the more they take.” The top federal income tax rate is currently 39.6%. After adding in any applicable state and local income taxes, some high-income earners are approaching a 50% tax rate!
Phantom Taxes for Higher Tax Brackets
Supplemental and/or “phantom” taxes also apply to high-income earners. A few examples follow.
- An additional 3.8% tax on net investment income applies for single taxpayers with modified adjusted gross income (MAGI) above $200,000 and for married couples filing jointly with MAGI above $250,000.
- Medicare beneficiaries generally must pay higher Medicare Part B and Part D premiums if MAGI exceeds $85,000 for single taxpayers and $170,000 for married filing jointly.
- Those in the highest federal tax bracket pay an additional 5% tax on capital gains.
- Alternative Minimum Tax may apply, some tax deductions/exemptions begin to “phase-out” at certain levels, etc.
Good Planning isn’t just about Paying Lower Taxes Today
Although our federal income tax code arguably penalizes high-income earners, there are numerous opportunities to legally reduce/minimize taxes. Each opportunity implemented is valuable due to the high rate of tax saved. Not only are opportunities available to reduce taxes today, but competent planning can (and should!) look for opportunities to reduce income taxes over a lifetime and, in some cases, for the next generation. Sometimes, for instance, one may be wise to forego a tax deduction (therefore paying more income taxes now) to create an income tax-free asset for future needs.
The most important reason for reducing lifetime income taxes is to redirect that money towards funding your life and legacy. No one has said, “Our federal government can use my money more wisely than I can.” We should pay our fair share, but there are numerous opportunities the government provides to minimize our taxes. The combination of advanced technology and a relationship with a competent team of financial advisers can help you minimize taxes and maximize the investment to your life and legacy. Remember… Uncle Sam isn’t really your uncle, so be wise in your tax planning.
Published: July 27, 2016
Author: Terry Prather, CFP®, ChFC®, MSFS
Phone: (812) 602-6307
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