Earlier today, the IRS released Publication 1304, the 2013 Individual Income Tax Returns Complete Report. At 348 pages, it's a behemoth, but it warranted a closer look because 2013 represented a sea change for individual income taxes.
In case you forgot, on January 1, 2013, a host of individual tax increases -- some direct, some not-so-direct -- became effective, including:
- an increase in the top rate on ordinary income from 35% to 39.6%,
- an increase in the top rate on qualified dividends and long-term capital gains from 15% to 20%, and
- a phase-out of itemized deductions and personal exemptions for high-income taxpayers.
Those changes, of course, were all tweaks to existing law. There was also another increase that took effect in 2013, however, and this one was brand spankin' new: the "net investment income tax" of Section 1411. It works like so:
Certain taxpayers began paying an additional 3.8% surtax on the lesser of:
- The taxpayer’s “net investment income,” or
- The excess of the taxpayer’s “modified adjusted gross income (this will be equivalent to adjusted gross income in most cases), over
- $250,000 if married filing jointly,
- $125,000 if married filing separately, or
- $200,000 for all other taxpayers.
In (very) general terms, “net investment income” includes income from interest, dividends, rents, royalties, passive activities, and gain from the sale of most properties.
The new tax is expected to raise $123 billion between 2013 and 2019. So who foot the bill in 2013, and how did it compare to expectations?
The answer to the first question is obviously “the wealthy,” as the tax generally only applies to taxpayers with adjusted gross income in excess of $200,000, which immediately limits its application to roughly 2% of the population. In 2013, this encompassed just over 3 million tax returns, with those taxpayers paying $16.5 billion in extra tax courtesy of Section 1411.
According to this study performed by the venerable eggheads at the Tax Policy Center, it was anticipated that the wealthiest 1% would bear 88% of the total tax increase resulting from the net investment income tax. And as is often the case, the TPC was pretty damn accurate: taxpayers with adjusted gross income in excess of $500,000, which generally represents the richest 1% of the population, accounted for 85% of the total net investment tax, with an average tax increase per taxpayer of $16,000.
The TPC also estimated that the richest 10% of the richest 1% — or the richest .1%, if you’re into decimals – would pay a whopping 52.5% of the total cost of the new tax, with an estimated per-taxpayer annual addition to tax of $131,000. The actual numbers? The richest .1% bore 58.5% of the net investment income tax, with those taxpayer seeing their tax increase by an average of $85,000 due to the imposition of Section 1411.
Of course, as discussed above, the net investment income tax was but a small part of the 2013 increases. In total, the changes listed at the outset of this post increased total tax revenue by $60 billion, with nearly every penny of that taken from taxpayers with adjusted gross income in excess of $200,000.
Breaking things down between income brackets, taxpayers with adjusted gross income between $500,000 and $1 million experienced an average tax increase of $12,000, those with income between $1 million and $1.5 million saw their tax bill increase by an average of $43,000, those with income between $1.5 million and $2 million experienced an average increase of $75,000, and taxpayers with income of more than $5 million but less than $10 million experienced an average increased tax bill of $400,000.
Finally, taxpayers with income in excess of $10 million experienced an average tax increase of $1.5 million.
The stated goal of President Obama in enacting these four targeted tax increases was to ensure that the rich pay their "fair share." Whether an additional $60 billion in revenue is enough to satisfy the current administration remains to be seen.
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