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 straight-forward. If you’re lucky enough to find yourself in the dilemma of figuring what the taxes are on a million dollars, 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.
Taxation on 1 Million Dollars of Earned Income
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 2017 tax year, there are seven tax brackets ranging from 10 percent to 39.6 percent. With an earned income of 1 million dollars, you will find yourself squarely in the 39.6 percent bracket for the majority of your income. 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. Once you reach the highest tax bracket of 39.6 percent, only your income that exceeds the minimum for taxation at that level will be taxed at 39.6 percent. For instance, if you are single and looking to file taxes on 1 million dollars of earned income, your income up to $9,325 is taxed at 10 percent, and income between $9,326 and $37,950 is taxed at 15 percent. This continues incrementally up to the highest federal income tax rate of 39.6 percent. In the case of a single filer, only income exceeding $418,400 is subject to taxation at 39.6 percent.
Here are the 2017 earned income thresholds for the 39.6 percent tax bracket:
39.6 Percent Tax Rate
- Single: $418,001 or more
- Head of Household: $444,551 or more
- Qualifying Widow/er or Married Filing Jointly: $470,701 or more
- Married Filing Separately: $235,351 or more
Unearned Income Taxation
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.
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