Millionaires and taxes

Associated press says only 1470 U.S households reported income of a million dollars or more last year. http://heraldbulletin.com/v?vid=ndn-23531502&sid=AP%20Editors%20Picks&widget=ap&site=heraldbulletin&section=homepage

Wikipedia (yeah, I know) says there are ten and a half million millionaire households in the U.S. http://en.wikipedia.org/wiki/Millionaire#United_States

Does that mean most of the millionaires’ real income is from capital gains, taxed at only 15%?

No, you misread the story:

Only 1470 millionaires paid no federal income tax.

First of all, “millionaire” and “someone who has income of a million dollars or more” are two completely different creatures. There are a lot more of the first than of the second.

Second, IRS says that in 2009, 234,650 tax returns were filed for adjusted income of $1M+. I presume 2010 had a similar number. No idea how Associated Press managed to be so wildly wrong.

Nope, I did NOT misread anything- my link is to a video. It said what it said, so it’s wrong, I guess. I understand how a person can have a net worth higher than his annual income.

I still am curious- do most millionaires get most of their income from investments rather than wages or salary?

Yeah, the video is wrong, as SpoilerVirgin points out.

One thing about capital gains–many people speak of “the capital gains tax” as if it’s a separate tax from the U.S. federal income tax on ordinary income, but it’s not. There’s just one U.S. federal income tax, but there are all sorts of tax rates. The two types of tax rates everyone knows about are the graduated rates for ordinary income and the 15% rate for capital gains, but there are actually a lot more rates than that (e.g., 28% for sales of “collectibles” and 25% for “unrecaptured 1250 gain,” which is basically the gain created by depreciating real estate).

How does depreciating real estate create a gain?

How are most of the millionaires who pay no tax doing it? Is the tax free million dollars a one time thing for most of these people, like somebody with no other source of income who collects life insurance or inherits an estate worth over 1 million (and below the exclusion limit). Or are these people who annually net over a million yet pay not taxes?

Paying no tax at all seems kind of unlikely for somebody netting a million dollars. Most investors would probably not put 100% of their money in tax free securities or some sort of tax evasion scheme.

It does’t

When I was growing up long ago, a millionaire had $1,000,000 net worth, but I’ve noted that (probably due in part to inflation) the meaning has mutated, and is now perhaps ambiguous.

Because depreciation deductions reduce basis.

Let’s say you buy a building for $100, take $5 of depreciation deductions each year for 5 years, and then sell the building for $150. You’d have $75 of gain ($150 amount realized minus $75 of adjusted basis), $25 of which would be unrecaptured 1250 gain.

Well, you are right that it’s “kind of unlikely” since apparently only 1% of people with income of over a million bucks paid no tax.

The simplest way for this to happen is a loss carryover from a prior year that is in excess of this year’s income. So, the guy doesn’t work, realized losses of $2 million last year and gross income of $1 million this year. And there could also be some tax-exempt income and tax credits in there to help out as well.