3 Tax Issues to Consider for High-Income Individuals

High-income taxpayers have a unique set of tax issues that can become complicated without the help of a tax pro.

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When it comes to paying income tax, those with higher income have several things to consider as they prepare their returns. Just as those with low incomes qualify for some different tax breaks, so do high income earners. As a tax professional, you’ll want to help your clients with a higher income take advantage of those tax rules and issues that may qualify them to keep a little more of their hard-earned money.

Tax brackets and income levels

In 2017, sweeping tax reform was ushered in, causing the IRS to release new tax brackets. Currently there are seven tax brackets. At the end of 2018, the IRS revealed the new income tax brackets for 2019. While there are no major shifts in tax brackets, the upper limits of all the tax brackets did increase slightly. You can help your high-income clients understand more about tax brackets and how they affect their tax returns. 

Here are the tax brackets for the highest three income ranges:

  • 32% tax rate: $160,725 to $204,99 (Single); $321,450 to 408,199 (Married Filing Jointly)
  • 35% tax rate: $204,100 to $510,299 (Single); $408,200 to $612,349 (Married Filing Jointly)
  • 37% tax rate: $510,300+ (Single); $612,350+ (Married Filing Jointly)

Generally, individuals are required to pay more income tax as their earnings increase and as they move up to higher tax brackets. High-income individuals must navigate through quite a few issues when it comes to U.S. income tax. It’s important for you to be aware of the most common issues affecting high-income taxpayers so you can better serve your clients that fit into these highest tax brackets.

3 tax issues affecting high-income clients

We’ve compiled a list of common issues to consider for your high-income clients as tax season approaches.

Alternative Minimum Tax 

The alternative minimum tax (AMT) is an additional tax imposed on taxpayers who have alternative minimum taxable income over a certain threshold. IRS Form 6251 is used to determine a taxpayer’s alternative minimum taxable income. In order to determine this income, certain itemized deductions and tax breaks are added back to adjusted gross income (AGI). 

Here are the numbers for 2019:

Single Filers: $71,700
Married Filing Jointly: $111,700
Married Filing Separately: $55,850

Some of those deductions include:

  • State and local income taxes
  • Medical expenses
  • Real estate taxes
  • Personal property taxes
  • Miscellaneous itemized deductions
  • Interest on home equity loans
  • Deduction for a net operating loss

Once these deductions and tax breaks are added back into the adjusted gross income, the taxpayer then subtracts an exemption amount. The exemptions phase out as the taxpayer’s income passes a certain threshold. Phasing out begins at the following levels:

Married Filing Jointly: $1,020,600
All Others: $510,300

After calculating the alternative minimum taxable income and subtracting the exemption, the remainder is subject to one of two tax rates. For the tax year 2018, the AMT tax rate is 26% if income was $194,800 or less (for all filers except married filing separately) and 28% if income was more than $194,800 (for all filers except married filing separately). The 28% tax rate kicks in at $97,400 for taxpayers who are married filing separately.

Understandably, this tax can be very confusing for taxpayers who are required to fill out the form. You can help your clients navigate the AMT.

Net Investment Income Tax

Net investment income tax (NIIT) is assessed on “unearned income” at 3.8% if the taxpayer earns more than $250,000 (married filing jointly), $200,000 (single), or $125,000 (married filing separately). These rates are the same as in 2017 and they will not adjust unless Congress introduces new legislation to change them.

The unearned income includes: 

  • Interest
  • Royalties
  • Rental income
  • Dividends
  • Non-qualified annuities

NIIT can be imposed on estates and trusts when the adjusted gross income passes a certain threshold. This tax is also imposed on resident aliens along with U.S. citizens. Those who are not citizens are not subject to NIIT.

In order to pay NIIT, taxpayers must calculate their modified adjusted gross income (MAGI). MAGI is adjusted gross income increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions or exclusions disallowed. Individuals, estates, and trusts will use IRS Form 8960 to compute their NIIT.

Estate Tax 

High-income individuals also need to plan for tax on their estates. Estate tax is a tax on the right to transfer property at the time of a taxpayer’s death. The total value of these items is called “Gross Estate” which is then reduced by certain deductions to arrive at the "Taxable Estate." The estate tax is imposed on an estate’s value that exceeds a certain exemption level. 

For the 2018 tax year, this exemption is at $11.4 million for individuals. This means someone can leave that amount to someone and there would be no gift tax or federal estate tax. For married couples, that amount Is $22.8 million. Once taxable gifts exceed this amount, a federal estate tax return (IRS Form 706) along with an estate tax payment is required by the IRS.

High-income taxpayers have a unique set of issues for their tax returns, especially as they are still adjusting to the tax reform enacted just a few years ago. These issues can become very complicated and tangled without assistance from a qualified tax professional. With proper tax planning, many of these additional tax obligations can be managed and minimized if possible.

Interested in reading more about tax considerations for your clients? Check out How Taxes Are Expected to Change in 2019.