Most income taxes in the United States are paid by the people with the most income. That is in keeping with the generally progressive nature of the individual federal income tax, the primary source of government revenues, which applies higher tax rates to higher incomes. However, some taxes fall more heavily on people with less income, while the most affluent of all can sometimes pay little or no income tax. A financial advisor can help you plan to manage your taxes.
The Biggest Taxpayers
The biggest source of tax revenue in the United States is the federal individual income tax and the biggest source of individual income tax revenues consists of the nation’s highest earners. In 2023, according to an estimate of the Tax Policy Center, 67% of all federal income tax collected will come from the top 20% of earnings, who were bringing home more than $189,200 annually. The situation where a small minority of high earners pay most of the individual income taxes has remained steady for many years.
Beyond that, figuring out who pays the most total taxes in the United States is complicated by the fact that there are many types of taxes. Federal individual income taxes levied on earnings from working and investing is just one variety, albeit the most important.
Payroll taxes supporting Social Security, Medicare and unemployment benefits are the second-largest source of federal tax revenues. Employers deduct these Federal Insurance Contributions Act (FICA) taxes from workers’ paychecks.
Other taxes include corporate income taxes, estate taxes, gift taxes and customs duties. Excise taxes are assessed on gasoline, alcohol, gambling and some other products and services. These taxes land more or less heavily on different taxpayers. For example, lower-income workers pay a larger percentage of their incomes in payroll taxes than higher-income workers thanks to the cap on income subject to Social Security taxes.
The capital gains tax is a special tax imposed on certain types of investment income that is in lieu of and generally lower than the individual income tax rates. Capital gains taxes are mostly paid by people who have more assets, while people with few assets may pay little or no capital gains tax. Similarly, property taxes, which are the major source of revenue for state and local governments, are only levied on the owners of property such as real estate.
Factors Influencing Who Pays the Most Taxes
A number of factors determine how much someone pays in federal income tax. The interplay between these factors and taxpayers’ efforts to save on taxes while conforming to the tax law, is largely responsible for the complexity of tax planning and preparing tax returns. Here are some of the major considerations.
- Taxable income: As your income rises, you move into a higher tax bracket, which means more of your income goes to taxes.
- Filing status: Tax rates vary depending on whether you are filing as a single individual, a married couple filing jointly, a married couple filings separately or as a head of household.
- Adjustments to income. Retirement plan contributions, student loan interest payments and some other outlays can reduce your taxable income and your taxes.
- Exemptions: Taxpayers can further reduce income by claiming exemptions, including dependency exemptions for their children.
- Deductions: Yet another way to reduce taxable income is by claiming deductions. In addition to the standard deduction, you may be able to claim deductions for medical expenses, charitable contributions, home mortgage interest and other costs.
- Tax credits: Credits for education and energy conservation, among other categories, can not only reduce your taxes but result in the government sending you a check.
Managing your tax liability consists largely of working with these factors. For example, if you have an unusual amount of income in one year, you may be able to use averaging to spread the income among different taxable years, keeping you from moving into a higher tax bracket.
Using the capital gains tax to reduce income taxes is also important. If you have assets that have appreciated in value, you could be subject to a large capital gains tax bill when you sell them. On the other hand, if you never sell them, you may be able to pass them on to your heirs without ever paying any income tax on your increased wealth. Very affluent taxpayers can pay their bills while avoiding income and other taxes by a number of other means, including pledging their assets as collateral for loans, the proceeds of which are not taxable.
The Bottom Line
The people with the highest incomes generally pay the highest taxes in the United States, thanks to the generally progressive individual income tax system used by the federal government. There are some exceptions to this type of policy, as very wealthy individuals can find ways to reduce their taxes – sometimes paying none at all – by making the most of so-called loopholes in the tax code. However, as a rule, the top 20% of earners pay more income taxes than the rest of the tax-paying population put together.
- Managing and reducing the amount of taxes you pay can benefit from the assistance of a financial advisor. Finding a financial advisor doesn’t need to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s Federal Income Tax Calculator can help you break down your tax obligations including the total tax as well as the type of tax and your marginal and effective tax rates.
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Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.