Myth Busting: A Look at the Tax Rates of Rich Married Couples with Long-Term Capital Gains vs. Middle-Income Married Couples with Earned Income

[mikegriffith1]

The myth persists among some folks that rich people who get their income from capital gains pay a lower tax rate than average middle-income taxpayers. This is demonstrably false.

The following figures are based on the 2024 federal income tax tables and the 2024 federal capital gains tax tables for long-term capital gains (short-term capital gains are taxed like regular earned income).

Take a middle-income married couple who file a joint return and who have a total household income of $94,300. They will pay $10,852 in federal income taxes, for a marginal tax rate of 11.5%, before they apply the standard deduction. Their tax bill and tax rate will go down after they claim the standard deduction.

If an income of $94,300 seems too high for a fair comparison, let's take a married couple who file a joint return and who have a total household income of only $60,000. They will pay $6,736 in federal incomes taxes, for a marginal tax rate of 11.2%, before they apply the standard deduction. Their tax bill and tax rate will go down after they claim the standard deduction.

Now, take a rich married couple who get their income from long-term capital gains, who file a joint return, and who make, say, $4 million per year from long-term capital gains. They will pay $755,476 in federal capital gains taxes, for a marginal tax rate of 18.8%. The standard deduction won't help them much because it caps at $29,200.

A tax rate of 18.8% is much higher than a tax rate of 11.5% and 11.2%--and, again, this is not counting the standard deduction, which will help the two middle-income couples far more than the rich couple.

 

[ReinyDays]

The myth persists among some folks that rich people who get their income from capital gains pay a lower tax rate than average middle-income taxpayers. This is demonstrably false.

The following figures are based on the 2024 federal income tax tables and the 2024 federal capital gains tax tables for long-term capital gains (short-term capital gains are taxed like regular earned income).

Take a middle-income married couple who file a joint return and who have a total household income of $94,300. They will pay $10,852 in federal income taxes, for a marginal tax rate of 11.5%, before they apply the standard deduction. Their tax bill and tax rate will go down after they claim the standard deduction.

If an income of $94,300 seems too high for a fair comparison, let's take a married couple who file a joint return and who have a total household income of only $60,000. They will pay $6,736 in federal incomes taxes, for a marginal tax rate of 11.2%, before they apply the standard deduction. Their tax bill and tax rate will go down after they claim the standard deduction.

Now, take a rich married couple who get their income from long-term capital gains, who file a joint return, and who make, say, $4 million per year from long-term capital gains. They will pay $755,476 in federal capital gains taxes, for a marginal tax rate of 18.8%. The standard deduction won't help them much because it caps at $29,200.

A tax rate of 18.8% is much higher than a tax rate of 11.5% and 11.2%--and, again, this is not counting the standard deduction, which will help the two middle-income couples far more than the rich couple.

Can you post your math please ...

I'm looking at line 6 of the "Qualified Dividends and Capital Gain Tax Worksheet—Line 16" on page 36 of the 1040 Instructions ... the middle income examples in your post would pay nothing if their income was all business Cap Gains ...

The rich income example as earned income would be taxed at $1,438,187 which is 36% ...

 

[mikegriffith1]

Can you post your math please ...

I'm looking at line 6 of the "Qualified Dividends and Capital Gain Tax Worksheet—Line 16" on page 36 of the 1040 Instructions ... the middle income examples in your post would pay nothing if their income was all business Cap Gains ...

The rich income example as earned income would be taxed at $1,438,187 which is 36% ...

One, business capital gains are usually short-term capital gains, which are taxed the same as earned income.

Two, obviously, a middle-income level of capital gains would pay a vastly lower rate than the example in the OP because I was debunking the myth that rich people who get their income from capital gains pay a lower tax rate than middle-income wage earners.

Three, I said I was using the 2024 federal tax tables for long-term capital gains and earned income taxes.

Four, in order for a married couple who get their money from long-term capital gains to pay no federal capital gains taxes, they would have to make less than $96,700, which is hardly "rich." And keep in mind that that couple would not qualify for Medicare and Social Security benefits because there are no SS and Medicare taxes on long-term capital gains, so they would have to set aside a sizable chunk of their capital gains for retirement and medical costs in retirement.

 

[jwoodie]

The myth persists among some folks that rich people who get their income from capital gains pay a lower tax rate than average middle-income taxpayers.

I think the real issue is rich people paying a lower capital gains rate while middle-income taxpayers paying an income tax rate. That is why Warren Buffet could deceptively claim he paid less taxes than his secretary. The bigger inequity is that rich people can pass appreciated assets to their beneficiaries without ever paying any capital gains taxes.

 

[mikegriffith1]

I think the real issue is rich people paying a lower capital gains rate while middle-income taxpayers paying an income tax rate.

But, as the OP proves, the rich do not pay a "lower capital gains rate" than the income tax rate paid by middle-income wage earners. They pay a higher tax rate, and that is not even counting the standard deduction, which does the rich virtually no good but does a great deal to lower the tax burden on middle-income workers.

That is why Warren Buffet could deceptively claim he paid less taxes than his secretary.

For anyone who knows anything about the tax system, the claim was absurd on its face, yet the hate-the-rich crowd gobbled up without a second thought.

The bigger inequity is that rich people can pass appreciated assets to their beneficiaries without ever paying any capital gains taxes.

Nobody should pay any taxes on money they inherit. If I am able to leave money for my children after I move on to the next world, where in the devil does the government get off coming in and taking a dime of it? For starters, much of that money has already been taxed, multiple times. If it was not taxed, that was only because I did not use it.

 

[jwoodie]

Take a middle-income married couple who file a joint return and who have a total household income of $94,300. They will pay $10,852 in federal income taxes, for a marginal tax rate of 11.5%, before they apply the standard deduction. Their tax bill and tax rate will go down after they claim the standard deduction.

Wrong. Their MARGINAL tax rate is 22%, which goes up to 24% once their taxable income exceeds $100,525.

 

[Robert W]

The myth persists among some folks that rich people who get their income from capital gains pay a lower tax rate than average middle-income taxpayers. This is demonstrably false.

The following figures are based on the 2024 federal income tax tables and the 2024 federal capital gains tax tables for long-term capital gains (short-term capital gains are taxed like regular earned income).

Take a middle-income married couple who file a joint return and who have a total household income of $94,300. They will pay $10,852 in federal income taxes, for a marginal tax rate of 11.5%, before they apply the standard deduction. Their tax bill and tax rate will go down after they claim the standard deduction.

If an income of $94,300 seems too high for a fair comparison, let's take a married couple who file a joint return and who have a total household income of only $60,000. They will pay $6,736 in federal incomes taxes, for a marginal tax rate of 11.2%, before they apply the standard deduction. Their tax bill and tax rate will go down after they claim the standard deduction.

Now, take a rich married couple who get their income from long-term capital gains, who file a joint return, and who make, say, $4 million per year from long-term capital gains. They will pay $755,476 in federal capital gains taxes, for a marginal tax rate of 18.8%. The standard deduction won't help them much because it caps at $29,200.

A tax rate of 18.8% is much higher than a tax rate of 11.5% and 11.2%--and, again, this is not counting the standard deduction, which will help the two middle-income couples far more than the rich couple.

Democrats spread those myths. Actually when the Rich employ workers, they pay workers more than earning just so workers pay income taxes. In other words the rich multiply taxes to the feds by hiring thousands of workers.

We could cure this insane jealousy by changing to a sales tax system used successfully in states.