It’s tax time and that means the rich better get ready to open their wallets to pay even more this year. Depending on where you fall on the political spectrum, that’s a bit of news that could have you cheering or grumbling.
Watch the video below to see Money Talks News financial expert Stacy Johnson give a rundown of what’s on tap, taxwise, for the rich as they prepare their 2013 returns. Then, keep reading for more details and to find out if the rich really are paying their fair share.
5 ways the rich are getting hammered
The tax code is ever evolving, and several provisions of the ironically named American Taxpayer Relief Act actually mean wealthy taxpayers are paying more. Here are some of the new ways the rich may see their tax bill go up:
- Special tax rate for top incomes. The top tax rate used to be 35 percent, but the American Taxpayer Relief Act added a new rate for those earning more than $400,000 on a single return or $450,000 on a joint return. Make money above those amounts, and you’ll be sending 39.5 percent of it to Uncle Sam.
- More capital gains tax. Most taxpayers will pay a 15 percent tax on long-term capital gains – that is, profits made off the sale of investments held for more than a year. However, once you hit that $400,000/$450,000 income level, you’ll start pitching in an extra 5 percent of your profits to the government. Individuals with incomes at those levels have a long-term capital gains tax rate of 20 percent.
- Medicare surtax. Sometimes called the Medicare contribution tax, this tax comes compliments of health reform. If you have an adjusted gross income of more than $200,000 on a single return or $250,000 on a joint return, you could get hit with a 3.8 percent tax on investment income such as interest and dividends.
- Medicare surtax for the self-employed. If you work for yourself and earn more than $200,000 or $250,000 on a single or joint return, respectively, you get to pay an extra 0.9 percent in Medicare tax. Lucky you!
- Pease limitation. Finally, the American Taxpayer Relief Act reintroduced the Pease limitation, a provision that had been eliminated by the Bush-era tax cuts. Named for the congressman who helped create it, the Pease limitation restricts the ability of wealthy taxpayers to claim certain deductions. For 2013 taxes, this provision kicks in once your adjusted gross income hits $250,000 for single filers and $300,000 on a joint return.
How much do the rich really pay?
Oh, boo hoo, you say. The rich have plenty, and they are always weaseling their way out of taxes anyhow, right?
How much in income taxes do the wealthy pay? CNN reported last year:
The top 10 percent of taxpayers paid over 70 percent of the total amount collected in federal income taxes in 2010, the latest year figures are available, according to the Tax Foundation, a think tank that advocates for lower taxes. That’s up from 55 percent in 1986.
The remaining 90 percent bore just under 30 percent of the tax burden. And 47 percent of all Americans pay hardly anything at all… .
That’s just federal income tax and doesn’t include payroll tax for Social Security and Medicare (which the vast majority of people pay), plus state taxes and all of the other taxes we face. When you add them all together, using figures from the Tax Policy Center and the Institute on Taxation and Economic Policy, Josh Barro at Business Insider wrote:
Earners in the top 1 percent pay about 43 percent of their incomes in tax. People in the middle quintile pay 25 percent. The poorest fifth pays 13 percent.
Finally, before you assume these one- and 10-percenters are living on luxury yachts and in million-dollar mansions, consider how little money it takes to be a top wage earner. According to 2011 IRS data, the top 1 percent have adjusted gross incomes of $388,905 per year or more. To be in the top 10 percent, you need an adjusted gross income of just $120,136 or more.
Good incomes to be sure, but definitely not enough to be vacationing in Tahiti 10 months of the year.
Tips to reduce your tax burden
Regardless of how much money you make, unless the government is your favorite charity, there is no reason to pay a single cent more in income taxes than you have to.
Check out the Money Talks News Tax Hacks 2014 series to learn how to avoid costly tax-time mistakes, reduce your chance of an audit and uncover how to take a home office deduction, among other things.
As for the rich getting hit with taxes, what do you think about the progressive tax system? Is it right for the rich to pay more since they make more? Connect with other readers by commenting below or visiting our Facebook page.