What Are Taxes on One Million Dollars?

The amount of taxes you can expect to pay on 1 million dollars depends on where the money comes from, among other considerations. While you can rest assured that the IRS will want its cut, determining the taxes is not so straightforward. If you’re lucky enough to find yourself in the dilemma of figuring out if you won a million dollars how much would you get after taxes, it could be helpful to consult with a tax advisor who can help you navigate the choppy waters of being taxed at the highest federal levels.

How much you are taxed on income depends on various factors. Your age, filing status and your amount of gross income earned are all taken into consideration when determining your tax bracket. For the 2020 tax year, there are seven tax brackets ranging from 10 percent to 37 percent. With an earned income of 1 million dollars (which Powerball winners often find themselves with) you will find yourself squarely in the 37 percent bracket for the majority of your income. The same percentages would apply to taxes on 1 million dollars lottery winnings. However, it is a common misconception that taxpayers in the highest brackets must pay that percentage on the entirety of their income.

The reality is, most taxpayers – except those in the lowest tax bracket – are actually paying taxes in two or more brackets. Because the rate is progressive, you are taxed incrementally at each level or bracket your income reaches and then exceeds. For 2020, once you reach the highest tax bracket of 37 percent, only your income that exceeds the minimum for taxation at that level will be taxed at 37 percent.

For instance, if you are single and looking to file taxes on 1 million dollars of earned income in 2020, your income up to $9,875 is taxed at 10 percent, and income between $9,876 and $40,125 is taxed at 12 percent. This continues incrementally up to the highest federal income tax rate of 37 percent. In the case of a single filer, only income exceeding $518,401 is subject to taxation at 37 percent.

Read More: Earned Income Tax Credit: What It Is and How to Qualify

Here are the 2018 earned income thresholds for the 37 percent tax bracket:

37 Percent Tax Rate

• Single: $518,401 or more
• Head of Household: $518,401 or more
• Qualifying Widow/er or Married Filing Jointly: $622,051 or more
• Married Filing Separately: $311,026 or more

Unearned income is any money you receive without having to provide services in order to receive payment. Some of the more common sources of unearned income include stock interest, dividends, rental payments and capital gains, however, there are others. Although the IRS has clear rules on what is and is not considered unearned income, different types of unearned income are taxed differently. It is also worth noting that you will not owe Federal Insurance Contributions Act, or FICA, taxes on your unearned income, and certain unearned income is taxed at a lower rate than your marginal tax bracket rate.

Unearned income from certain long-term capital gains is taxed at either 0 percent, 15 percent or 20 percent, depending upon the source of the income and your ordinary tax bracket. However, there are some forms of unearned income that are taxed at your marginal tax rate, such as short-term capital gains, interest from savings accounts and CDs, pension payments and IRA withdrawals.

Because what the IRS considers unearned income consists of some things you may not think would be considered unearned income, it is best to consult with a qualified tax professional and familiarize yourself with the IRS’ website for more guidance.

Read More: How to Calculate Capital Gains Taxes