Last year, with the passage of Taxpayer Relief Act of 2012, a number of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. changes were enacted. In addition, a few Obamacare taxes went into force. Although most taxpayers and Americans will be affected by these changes over time, most of the tax changes for this filing season target the highest income earners.
The most notable changes for taxpayers this filing season:
- A new 39.6 percent income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. for those making over $400,000
- Phase-out of the personal exemption and itemized deductions for those making more than $250,000
- A new 0.9 percent tax on Medicare wages for those making more than $200,000
Add these new taxes to state income taxes, such as California’s 13.3 percent income tax rate on those making $1 million or more, and the top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. faced by high-income earners can be over 50 percent. A marginal tax rate is the rate your next dollar of income over a certain level is taxed, not to be confused with an average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. , which is your total taxes paid over your total income.
Californians face the highest top marginal tax rate on wage income at 51.9 percent, followed by Hawaii (50.5 percent), and New York (50.3 percent). Even high income earners in states with no income tax such as New Hampshire, Texas, and Nevada face top marginal income tax rates over 42 percent. The average across all states is about 48 percent.
Update: Minnesota increased its top income tax rate (7.9 percent to 9.85 percent) in 2013 which retroactively applied to January 1, 2013. The new top marginal income tax rate for Minnesota taxpayers is 49.8 percent, the fifth highest in the nation.
| Top Marginal Income Tax Rate on Wage Income, 2013 | ||
| Rank | State | Rate |
| 1 | California | 51.90% |
| 2 | Hawaii | 50.50% |
| 3 | New York | 50.30% |
| 4 | Oregon | 49.90% |
| 5 | Minnesota | 49.80% |
| 6 | New Jersey | 49.30% |
| 6 | Vermont | 49.30% |
| 8 | Maryland | 49.20% |
| 9 | Maine | 49.00% |
| 10 | North Carolina | 48.60% |
| 10 | Wisconsin | 48.60% |
| 12 | Ohio | 48.50% |
| 13 | Idaho | 48.40% |
| 13 | Kentucky | 48.40% |
| 15 | Arkansas | 48.10% |
| 15 | Montana | 48.10% |
| 15 | South Carolina | 48.10% |
| 18 | Delaware | 48.00% |
| 18 | Nebraska | 48.00% |
| 20 | Connecticut | 47.90% |
| 21 | West Virginia | 47.80% |
| 22 | Missouri | 47.60% |
| 23 | Georgia | 47.50% |
| 23 | Rhode Island | 47.50% |
| 25 | Iowa | 47.40% |
| 25 | Virginia | 47.40% |
| 27 | Massachusetts | 47.10% |
| 27 | Oklahoma | 47.10% |
| 29 | Illinois | 46.90% |
| 29 | Kansas | 46.90% |
| 29 | Mississippi | 46.90% |
| 29 | New Mexico | 46.90% |
| 29 | Utah | 46.90% |
| 34 | Arizona | 46.70% |
| 34 | Colorado | 46.70% |
| 34 | Indiana | 46.70% |
| 34 | Pennsylvania | 46.70% |
| 38 | Michigan | 46.60% |
| 39 | North Dakota | 46.30% |
| 40 | Louisiana | 46.10% |
| 41 | Alabama | 45.70% |
| 42 | Alaska | 42.80% |
| 42 | Florida | 42.80% |
| 42 | Nevada | 42.80% |
| 42 | New Hampshire | 42.80% |
| 42 | South Dakota | 42.80% |
| 42 | Tennessee | 42.80% |
| 42 | Texas | 42.80% |
| 42 | Washington | 42.80% |
| 42 | Wyoming | 42.80% |
| Washington D.C. | 49.30% | |
| U.S. Average | 47.90% |
Source: Gerald Prante and Austin John, “Top Marginal Effective Tax Rates by State and by Source of Income, 2012 Tax Law vs. 2013 Tax Law (as enacted in ATRA),” February 3, 2013.
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