Top 400 earners paid highest tax rate in 2013

The 400 Americans who earned the biggest incomes in 2013 paid the highest tax rate in 16 years — but they also saw their incomes drop.

To be in the top 400 club in 2013, the latest period of IRS data that's available, you needed to earn at least $100,069,000. That marked a drop from the cutoff in 2012, when you needed nearly $140 million. The total income of the top 400 also fell in 2013, to roughly $106 billion — about 1.17 percent of the nation's total income. That compares to $134 billion, or 1.48 percent, in 2012.

The drop might seem unexpected, given that the economy strengthened in 2013, and the stock market delivered its best performance in years. Yet the income drop and higher taxes were likely driven by the same phenomenon: federal tax hikes.

Income tax form 1040
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In 2013, federal income tax rates for those making more than $400,000 went from 35 percent to 39.6 percent for ordinary income, and capital gains taxes went from 15 percent to 20 percent, with an additional 3.8 percent Medicare surtax.

Anticipating the tax hikes, many of high earners sold stock or assets in 2012 to take their gains before taxes went up. That caused a massive jump in their reported incomes for 2012 — more than 50 percent compared with 2011 — and the subsequent drop in 2013.

"They shifted their income into 2012 because of the tax hikes," said Roberton Williams of the nonpartisan Tax Policy Center. "If they could take a gain in 2012, many people took it."

As a result, the top 400 earners paid higher effective rates in 2013. The top 400 paid an effective tax rate of 22.89 percent of their adjusted gross income, up from 16.72 percent in 2012. That marked the highest level since 1997.

"The tax hikes worked exactly as they intended, the wealthy paid more," Williams said.

Despite claims by some that the rich pay less than the rest of America, the average tax rate paid by the top 400 earners in 2013 was far higher than the share paid by most Americans.

According to the Tax Policy Center, Americans in the middle-income quartile paid an effective federal income tax rate of 3.1 percent of all their expanded cash income in 2013. The two lowest quintiles received money back from the government.

Most of the income for the super-earners in the U.S. comes from capital gains — usually the sale of a stock, business or real estate. In 2013, 54 percent of the group's adjusted gross income came from capital gains, down from 68 percent in 2012, due to the income shifting. Only 8.45 percent of their income came from wages and salaries.

Because most of the top 400 earners make the list by selling an asset or stock, they don't often appear again the following year. Of the 4,474 people who have been on the list since 1992, 72 percent have only made the list one year. Only 12 percent have made it two years, and fewer than 3 percent have been on the list for 10 or more years.

"The top 400 is people who hit it big in one year," Williams said. "They either sold stock or a family business and that pushed them up there. You don't usually get there through regular, recurring salaries."

The top 400 earners also gave large amounts to charity in 2013 — and, of course, received the most charitable deductions.

They had a total of $12.9 billion in charitable deductions contributions in 2013, or an average of $32.8 million per taxpayer. That was the second-highest level ever recorded, following 2012 at $15.1 billion. The top 400 earners accounted for more than 6 percent of all charitable deductions in the U.S. that year.