Last summer, the IRS released data on taxpayer incomes that offers intriguing insight into the taxes rich Americans pay.
The information suggests that the average person with an income north of $1 million per year pays 25% or more of adjusted gross income in taxes. Exactly how much money does the average American with a seven-figure-plus income pay in taxes? Read on to find out.
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Regular filers
The IRS reports that 44,500 Americans with adjusted gross income north of $1 million filed income tax returns using regular tax computation methods in 2013, including 2,100 Americans with incomes of $5 million or more.
Among those filers, Americans with income between $1 million and $1.5 million paid 28.1% of their adjusted gross income in taxes, or an average of $335,912.
Taxpayers within the $2 million to $5 million range paid an average 29.9% of their adjusted gross income in taxes, or an average of $862,938 per filer. And people with $10 million or more in income paid 27% of their adjusted gross income in taxes, or an average of $6.18 million per filer.
Source: IRS data for 2013. Regular filers only.
Schedule D filers
The IRS also reports that 299,741 millionaire income earners filed tax returns with a schedule D, the form used to report short- and long-term capital gains.
Among Americans in that camp with income between $1 million and $1.5 million, the average tax on adjusted gross income was 28.3%, and the average income tax paid was $341,275.
Americans earning between $2 million and $5 million had an average tax rate on adjusted gross income of 29.5%, resulting in an average tax bill of $876,770. And the tax rate for the richest of the rich -- those with incomes above $10 million -- was 26.2%, leading to an average tax bill of $7.74 million.
Source: IRS data for 2013. Schedule D filers only.
Fair play?
Billionaire investing guru Warren Buffett is famous for saying that he pays a lower income tax rate than his secretary, and he and other wealthy Americans unquestionably benefit from specific parts of the tax code, including a lower tax rate on capital gains.
Wealthy investment managers of certain partnerships, such as hedge funds, also benefit from the carried interest deduction, a quirk that allows them to categorize their 20% share in profits as capital gains, rather than income.
Thanks to tax loopholes like those, one out of every three of America's top 400 income earners, each of whom had income above $110 million, paid a tax rate that was less than 15% in 2008, according to a 2012 report from the White House's National Economic Council.
Source: White House National Economic Council.
Those Americans aside, the IRS data does suggest that many wealthy Americans do pay a higher tax rate than middle-class Americans, and therefore, tax reformists shouldn't cast too broad of a brushstroke across all millionaires.
Fool-worthy bottom line
No one wants to pay more in taxes than necessary, and there are reasonable exemptions that every American should embrace regardless of income, including tax-advantaged retirement accounts, health savings or flex-savings accounts, and college 529 savings plans.
Plans like these offer legitimate tax advantages that can help secure a financial future, regardless of income, and it would be silly not to max them out whenever possible, just as the richest Americans do.
