It’s no secret that high-income households have historically paid more than their fair share of income tax relative to their numbers.
For the 2013 filing season for 2012 individual income tax returns, as of July 25, 2013, IRS processed 137 million returns with adjusted gross income, or AGI ( gross income minus deductions for AGI ), totaling $7.6 trillion and income tax after credits totaling $894 billion. Of these returns, filers with AGI of $250,000 or more were responsible for:
2.5 million, or 1.8%, of total returns
$1.4 trillion, or 18.4%, of total AGI
$330 billion, or 36.9%, of total income tax after credits
2014 tax-season postmortem
Although the IRS hasn’t released statistics yet for the 2014 filing season, I recently completed a tax-season postmortem review of my tax-preparation clients’ 2013 income-tax returns. This is an annual ritual that I perform to assist clients with current-year income tax planning. It involves a detailed analysis of the various components of my clients’ income-tax returns to determine what steps can be taken to reduce their income-tax liability in the current year.
To analyze the impact of the various 2013 tax law changes, I supplemented my traditional review with preparation of pro forma, or “what if,” 2012 income-tax returns using 2013 income and deductions for clients in the top three tax brackets of 33%, 35%, and 39.6%. In other words, I applied the tax law in effect in 2012 to my clients’ 2013 tax returns.
In 2013, you were subject to the 33% rate when your taxable income (AGI minus the greater of itemized deductions or the standard deduction minus personal exemptions) exceeded approximately $183,000 if you used single filing status or $223,000 with joint filing status. You entered the 35% bracket at $398,000 with single or joint filing status. Finally, taxable income of $400,000 (single) or $450,000 (joint) subjected your taxable income to a 39.6% rate.
Even though I studied, wrote about it on my website (See: The 2013 Tax: Law Schizophrenic Definition of Income ) and did extensive income tax planning to reduce the fallout from the 2013 tax law changes, the review that I completed for the 2014 tax filing season was eye-opening. As expected, the impact on clients in the 33% and 35% tax brackets was minimal, with average income tax increases of 1.2% and 2.9%, respectively, for the same income and deductions in 2013 versus 2012.
It was a much different story, however, for clients in the 39.6% bracket. The average AGI for these clients exceeded $1.4 million in 2013. Their average income tax after credits was $436,000, or $51,000 greater than their pro forma 2012 average income-tax return liability of $385,000 with identical income and deductions.