Many high income earners we meet have a strong dislike for the word “taxes” – not because they don’t want to pay their fair share, but because our federal government’s definition of their “fair share” doesn’t typically agree with theirs.
Currently, the top federal tax rate on ordinary income is almost 40%. But that doesn’t tell the whole story. Let’s look at a few additional taxes on high-income earners.
- There’s an additional 3.8% tax on Net Investment Income for couples with MAGI above $250,000 (or $200,000 for single taxpayers). This came about through the Affordable Care Act.
- Those in the top tax bracket also see an increase in their long-term capital gains and qualified dividends tax from 15% to 20%. So this 20% + the 3.8% creates a whopping 23.8% tax (not including any potential state or local tax).
- Also, a “phase out” (aka reduction) of itemized deductions and personal exemptions starts for couples with AGI of about $310,000 for 2015. To illustrate these “phase-outs,” imagine Uncle Sam holding a coin while creating new tax laws. His caption would read, “Heads I win; tails you lose.” Heads would represent the increase in the tax rate while tails would represent these “phase outs” of deductions. Both result in higher taxes for certain high-income earners.
Now, these are just a few examples. You work hard to create a good income. Be wise in your planning to ensure you don’t pay Uncle Sam more than the law requires. Remember…he’s not really your uncle!
If you find yourself in this type of situation or one similar you are not alone. Let’s start a conversation as we are purposely built to help.
Published: August 28, 2015
Authored by: Terry Prather, CFP®, ChFC®
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The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.