April 5, 2017 in Taxes

5 special taxes that target the wealthy

The U.S. tax system is a progressive one, meaning the more money you make, the higher your taxes. Tax law changes in recent years demand even more of high earners:

While all these taxes are aimed at higher-income taxpayers, there is no particular income level at which a person is considered, for tax purposes, rich.

“Pretty much a different salary level is applied to different types of income,” says Mark Luscombe, CPA and principal federal tax analyst for Wolters Kluwer Tax & Accounting.

Tax rule changes may be coming again soon. But for now, more well-to-do individuals remain targeted by these five taxes.

Before the tax law was changed in 2012, the highest possible tax rate was 35 percent. It’s now 4.6 percentage points higher.

Wealthier individuals face a possible 39.6 percent tax on a portion of their wages, also known as ordinary income, once they exceed a certain threshold.

The income triggers are indexed for inflation. For the 2016 tax year, for example, married couples’ combined income must exceed $466,950 to be taxed at the top rate. For 2017, earnings above $470,700 by joint filers will be subject to the highest tax rate.

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Richer taxpayers also pay higher taxes on their investments.

The previous top capital gains rate was 15 percent on profits from assets sold after being held for more than a year. That long-term capital gains tax rate applied to taxpayers whose income fell into the 25 percent or higher tax bracket.

Now individuals whose income is in the top tax bracket — that 39.6 percent tax rate — face a 20 percent capital gains rate on profits from long-term asset sales.

All short-term capital gains — from sales of assets held for a year or less — continue to be taxed at your ordinary income tax rate, regardless of which tax bracket your income falls into.

What tax bracket are you in? Use Bankrate’s calculator to figure your marginal tax rate.

A provision in the Affordable Care Act calls for an additional 0.9 percent Medicare payroll tax on wage income over certain thresholds. This is on top of the 1.45 percent Medicare tax for which taxes already are withheld.

Employers must withhold the added tax when taxpayers’ income exceeds the following thresholds:

Filing status Income amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow/widower with dependent child $200,000

The added Medicare tax also applies to self-employment earnings. And the earnings thresholds are not indexed for inflation, so more individuals could face the tax as incomes increase.

Tax tip: If your employer withheld the added tax because you made more than $200,000, but your combined income with your spouse does not meet the $250,000 joint filing threshold, you’ll claim credit for any excess Medicare tax when you file your return.

The health care law also tacks a 3.8 percent tax on wealthier taxpayers’ investment income. This net investment income tax applies to taxable capital gains, dividends, interest, rental income and certain annuities, among other types of income.

The income thresholds are the same as for the Medicare tax with one exception: For qualifying widows and widowers the threshold is higher.

Filing status Income amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow/widower with dependent child $250,000

Again, these income limits are not indexed for inflation.

The tax applies to the lesser of these:

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Wealthier taxpayers also stand to lose portions of their personal exemptions and itemized deductions.

These tax breaks are phased out at higher income levels. The trigger thresholds for exemptions and certain itemized deductions for the 2016 tax year are incomes in excess of:

Personal exemptions — worth $4,050 each for yourself, spouse and any dependents for the 2016 and 2017 tax years — help reduce adjusted gross income to a lower taxable income amount. The exemptions shrink once income exceeds the trigger amount listed above.

Better-off taxpayers who itemize also could lose some of the value of common deductions, such as mortgage interest, state and local taxes paid and charitable donations.

The exemptions can be zeroed at completely at some very high income levels. That doesn’t happen with the itemized deductions, though they could be reduced enough to cause wealthier filers some tax pain.