Federal Income Tax Increases in Coming Years

The federal income tax increases over the next three years have led to lots of grumbling. But for all the back and forth about the percentages, something has been overlooked: what do these increases mean in real numbers? In other words, how much will wealthy people have left after they pay the higher taxes in the coming years?

What may surprise some people is that the various percentage point increases do not necessarily correspond with the reactions surrounding them. The 3.8 percent Health Care Act surcharge attracted much populist anger, but in many cases, it will result in a lower tax increase than the 0.9 percentage point rise in the Medicare tax. This is because of how and on what part of your income the taxes are applied.

By Summit’s calculations, that $250,000 tax increase would apply next year to a couple filing jointly with $5 million in annual income. The calculations also looked at people earning $500,000, $1 million and $3 million a year.

While the tax increase next year is substantial, another increase comes in 2013, when provisions to pay for the health care bill take effect. Following are some general estimates for people at the four different income levels. (By the way, these tax increases aim only at single people making more than $200,000 a year and couples with incomes above $250,000.) All the assumptions below were based on a married couple filing jointly and without considering the alternative minimum tax, a parallel tax system aimed at a certain slice of high earners that excludes many deductions.

According to Summit’s calculations, the couple earning $500,000 a year, with an assumed $75,000 in net investment income and an equal amount in itemized deductions, is looking at a tax increase of $20,327 in 2011, from 2010. That would bring their federal tax bill to $162,885.
A couple earning $1 million a year with $150,000 in investment income and the same amount in deductions would pay $48,427 more for a federal total of $363,235. Under the same assumption of investment income and deductions being equal, a couple earning $3 million a year could expect an increase of $145,627 in federal taxes, to $1,174,435, and one earning $5 million, an increase of $243,027 for a total of $1,975,835.

The Medicare increase would tax the first $250,000 for a couple at the existing 1.45 percent rate and anything above that at 2.35 percent. For the couple earning $500,000, this translates to an increase of $2,250, for a total Medicare tax of $9,500. In the $1 million situation, the tax would jump by $6,750, to $21, 250. For $3 million in income, it goes up $24,750, to $68,250. It rises $42,750, to $115,250, for the $5 million couple.

If the very wealthy couple had higher investment income, the tax could rise. But it is calculated by a formula that always compares the net investment income against the modified adjusted gross income and taxes the lower one.