The groundbreaking study from the Internal Revenue Service shows that the richest Americans pay lower taxes despite their high income. Find out the reason why in this Forbes.com article.
The Internal Revenue Service today released a new report showing that in 2010, as the nation’s stock markets recovered, the richest Americans saw their share of all national income rise and their effective federal income tax rate fall.
In 2008 and 2009, the wealthy saw their share of national income decline and their tax rates rise, in large part because their more lightly taxed capital gains fell. But in 2010, the top 1% (the 1.35 million families with adjusted gross income above $369,691), reported 18.87% of all AGI, up from 17.21% in 2009. Meanwhile their average tax bill (as a percentage of AGI) fell to 23.39% in 2010, from 24.05% in 2009.
The trends were even more favorable for the top 0.1% (the 135,000 households with income above $1.6 million), who captured the lion’s share of the 1%’s income gains, garnering 9.24% of all AGI, up from 7.94% in 2009. The tax rate paid by the top 0.1% fell to 22.84% in 2010 from 24.28% in 2009, meaning they paid a lower rate than their less rich fellow 1 per-centers. As a result, while the share of all income taxes paid by the top 0.1% also rose—to 17.88%, from 16.91% in 2010—it rose by less than the increase in their share of total national income.
The IRS report also shows that in 2010, 10,666 families reporting AGI of more than $10 million realized 5.5% of the nation’s taxable income, but a stunning 41% of all long term capital gains and corporate dividends taxed at the special low 15% rate; that 41% share equals $152.4 billion in such income, almost double the $77.9 billion in such long term gains and dividends reported by families with AGI above $10 million in 2009. The IRS hasn’t yet released its analysis of how the richest 400 fared in 2010, but it seems likely that their income share rose and their tax rate fell, since they’re even more dependent on lightly taxed capital gains. (In 2009, the richest 400 saw their income fall 25%, while their tax rate rose to 19.9%.)
Even more than a recovering economy, a surging stock market pads the reported incomes of the rich. After falling 38.5% in 2008, the S&P 500 rose 23.5% in 2009 and another 12.8% in 2010—meaning more investors finally had gains to realize. The S&P was flat in 2011 and up 13.4% in 2012, which was likely a huge year for capital gains realizations by the rich, as they took gains in advance of an expected increase in the tax rate for 2013. As part of the fiscal cliff tax deal, the capital gains rate was raised from 15% to 20% on taxable income above $400,000 for a single or $450,000 for a couple. In addition, as part of ObamaCare, a new 3.8% Medicare surtax applies to capital gains and investment income, to the extent a single filer has AGI above $200,000, or a couple has AGI above $250,000.
The IRS’ Statistics of Income division also published today preliminary estimates for 2011, which are less detailed by income level and don’t include tax returns filed after September 30th 2012, even though rich folks with the sort of extensive investments and partnership interests Mitt Romney has (a preliminary version of his 2011 return was 379 pages), often apply for extensions which allow them to delay filing until October 15th. Still, the IRS’ preliminary 2011 numbers—when compared directly with the IRS’ 2010 preliminary release—suggest the better off may have continued to increase their share of the national pie during 2011 too. While capital gains were down a tad, 23.4% of income in the 2011 preliminary numbers was reported by those with AGI above $250,000, up from 22.9% in 2010.
The 2011 preliminary report shows AGI on all tax returns (a total of 145.6 million were filed) increased by 3.1% to $8.3 trillion, with wages and pensions and annuities both rising 4% and corporate dividends rising 9%. But with the Federal Reserve keeping interest rates low, taxable interest fell 17%, a big hit to retirees who rely on interest from bank CDs or taxable bonds. Meanwhile, taxable distributions from IRAs rose 12%. The number of tax returns reporting taxable unemployment compensation declined 12%, while the amount of taxable unemployment benefits reported fell 23%.
Just 31.8% of the nation’s taxpayers claimed itemized deductions in 2011, down from the 32.6% of taxpayers who itemized in 2010. The falling share who itemize could be a factor as Congress considers whether to limit itemized tax deductions as part of a tax reform.
Know and understand your tax planning options by visiting this Isidor Hefter Facebook page.
.jpg)
