I have been wondering:
If you live in a high-tax US state, what is the maximum tax on income you would have to pay? Totalling state, federal and municipal taxes, as well as anything I haven’t remembered.
I am primarily looking for the top marginal tax, that is the tax on the last dollar earned.
In California those making the most would pay 13.3% in state tax, 1.5% in federal payroll tax, and 39.6% inf federal income tax. That comes to a total of 54.4% in income tax.
Well there’s this… A report on the 10 states with the highest taxes from 2016.
Up until the latest tax bill the state tax would have been deductible so you’d have paid a federal tax of .396*(1-.133) = .343. But a self-employed person would have paid 2.9% for Medicare (would also have paid both parts of Social Security, but that’s capped while Medicare is not ). Medicare tax is not deductible. SO the total rate would be 50.5% + Social security whose rate would depend on what your income was as it’s capped.
No cities in California have income taxes.
This is very, very complicated.
If you are getting Social Security and earning noticeable money on your investments your Federal marginal tax rate can be as high as 40%!
Some states tax Social Security and so your marginal rate can go quite a bit higher.
There are a lot of ways a person’s income tax can hit far more than the obvious marginal rates.
But there’s a lot of ways it can hit far lower than the obvious marginal rates as well. Most people earning noticeable money on their investments earn qualified dividends which have a maximum tax rate of 20% for taxpayers whose ordinary income falls in the 39.6% bracket. The same applies for long-term capital gains, which only require an investment be held for one year. Investment income is taxed at such a low rate compared to earned income that there are really two different tax codes.
Residents of Bridgeport, CT who make over $500,000 a year in income, pay 37.00% in federal income tax, 6.99% in state income tax, and 5.00% in city income tax. That’s a combined income tax rate of 48.99%.
It’s unclear, but those rates probably include other taxes besides income tax.
Please, please, please read up on Marginal Tax Rates. No one is paying 39%, 40%, 37% on their entire income. Your Guide to Tax Brackets in 2018 | The Motley Fool
The billionaire making $2 million a year is paying tax at the same rate as someone making $80,000.00 income for the first portion of the rich guys income up to $80k.
Brackets for Single folks:
10% $0-$9,525 10% of your taxable income
12% $9,525-$38,700 $952.50 + 12% of the amount over $9,525
22% $38,700-$82,500 $4,453.50 + 22% of the amount over $38,700
24% $82,500-$157,500 $14,089.50 + 24% of the amount over $82,500
32% $157,500-$200,000 $32,089.50 + 32% of the amount over $157,500
35% $200,000-$500,000 $45,689.50 + 35% of the amount over $200,000
37% Over $500,000 $150,689.50 + 37% of the amount over $500,000
It may sound silly but some of my educated friends seem to believe they are paying the single highest rate that applies to their gross income. (sigh)
Thanks, smithsb; you beat me to it.
The number of Americans who actually hold jobs and pay income tax every year, and who still don’t grasp the concept of marginal tax rates, is mind-boggling.
That said, if your income is much higher than the cutoff for the top bracket, then you’re going to be paying a total tax rate that’s very close to your marginal rate. Well, assuming that you’re not finding ways to shield most of your income, which you probably are if you’re making that much.
True enough.
If you’re a baseball player on a 15- or 20-million-dollar salary, and if we exclude any possible shelters, then your total federal income tax is going to be as near as dammit to the maximum rate.
Also true that the OP explicitly asked for the tax on the last dollar earned:
For purposes of answering that specific question, the fact that the first $500000+ dollars earned are taxed at a lower rate is irrelevant.
Crap! I completely missed that part of the OP. Apologies to puddleglum.
I understand how marginal tax rates work. But the OP specifically asked for the top rate not the overall rate.
Neat! Your reading skills are apparently on par with my own today, as you made this observation over an hour after two other people had pointed it out, and after I apologized for missing it.
Using 2017 rates, somebody in California who chooses to take the standard deduction with a sufficiently large amount of ordinary income from investments and who works a little at his small business (self employed) would be looking at marginal tax rate of: 39.6% (federal) + 13.3% (California, 1% of that a mental health services tax added to state income tax) +12.4% (Social Security) + 2.9% (Medicare) + 1% (California state disability insurance) = 69.2%. I am not sure, but self employed might also have to pay 0.6% for federal unemployment tax. If he refuses to get health care, he could also be subjected to additional taxes.
Even with no income, it is possible for somebody to get a large tax bill, for example the 50% penalty for failing to take a required minimum distribution from an IRA. There have been stories of very high marginal tax rates for people without high incomes, due to phase out rules of the ACA. There was talk of marginal rates of over 100% for the wealthy in early versions of last year’s tax bill.
Isn’t the 12.4% of Social Security capped at $127,000?
The California state disability insurance tax is also capped, I forget at what.
Sure it is. Making the tax rate that high requires playing a lot of games with the sources of income. Manlob says that the theoretical taxpayer “works a little at his small business”, making just enough to pay the maximum social security tax; and not so much as to have the tax rate decrease because of the cap. He also has a sufficiently large ordinary income from investments to be paying the maximum 39.6% federal tax, which requires a taxable income in excess of $418,401 for a single person, yet has no qualified dividend income or capital gains which are taxed at a maximum of 20%. It’s a purely hypothetical case; related to a spherical cow in a vacuum.