The Kiplinger Tax Letter Reveals the Top 0.001% of Earners Pay an Effective Rate of Just 23.61%

In tax year 2023, 1,531 returns with adjusted gross income above $78.6 million reported an average effective federal income tax rate of 23.61%. The top 1% of taxpayers reported a higher average effective rate of 26.27%. The effective rate declines at the very highest incomes, creating an inversion where the richest filers pay less than a broader high-income group. The difference stems from how income types are taxed. W-2 wages are taxed as ordinary income, reaching a 37% federal rate before payroll taxes. Long-term capital gains are taxed at a lower federal rate of 20%, and adding the 3.8% net investment income tax brings the total federal rate to about 23.8%.

"The top 0.001% of earners, the 1,531 tax returns reporting more than $78.6 million in adjusted gross income in tax year 2023, paid an average effective federal income tax rate of 23.61%. That is lower than the rate paid by the broader top 1%."

"The top 1% of taxpayers paid an average effective rate of 26.27% in 2023 . In contrast, the top 0.001%, an exclusive group of 1,531 filers reporting an AGI of more than $78.6 million each, paid an average effective rate of 23.61% . The effective tax rate clearly hits a ceiling and begins to decline as income climbs into the stratosphere."

"Upper-middle-class earners often assume the ultra-wealthy pay the top marginal rate of 37% on their income. The IRS data shows that the assumption is wrong by more than 13 percentage points. The headline rate exists in the code, but it diverges sharply from what the richest filers actually pay."

"The underlying mechanism is straightforward: a surgeon earning $700,000 in W-2 wages pays ordinary income tax on nearly all of it, with the top dollars taxed at a 37% federal rate before payroll taxes are factored in. In contrast, a hedge fund founder taking $80 million in long-term capital gains pays a top federal rate of just 20% on that income. Even when adding the 3.8% net investment income tax, the total federal rate reaches only 23.8%."

Read at 24/7 Wall St.