How Much Tax Do You Pay on a Million Dollars?

The tax on a million dollars varies significantly based on its source and the taxpayer’s financial situation. A bonus, investment gains, or lottery payout are taxed differently. Understanding these distinctions is important, as federal, state, and local tax laws, and the income’s nature, all influence the final tax liability.

Federal Income Tax Fundamentals

The United States uses a progressive federal income tax system, applying increasing rates to different income brackets. For 2024, federal income tax rates range from 10% to 37%.

Marginal tax rates apply to the last dollar earned, reflecting the highest bracket reached. Effective tax rates represent total tax paid divided by total taxable income, offering a comprehensive view. For example, a single taxpayer with $100,000 taxable income in 2024 would have a 24% marginal rate, but a lower effective rate due to lower rates on earlier income portions.

Federal income tax calculation starts with Adjusted Gross Income (AGI), found by subtracting “above-the-line” deductions from gross income. Taxpayers then reduce AGI using either the standard deduction or itemized deductions to reach taxable income. For 2024, standard deductions are $14,600 (single), $29,200 (married filing jointly), and $21,900 (heads of household). Progressive tax rates apply to this final taxable income.

Taxation Based on Income Type

Federal taxation of a million dollars depends significantly on its source, as different income types have distinct tax treatments. Understanding these classifications is essential for accurate tax estimation.

Ordinary Income

Ordinary income, including wages, salaries, self-employment earnings, and interest, is taxed at standard progressive federal rates. A $1,000,000 bonus or business profit in 2024 would be added to other ordinary income. A single taxpayer with $1,000,000 in ordinary taxable income would see a substantial portion taxed at the top 37% marginal rate (for income over $609,350 for single filers), with remaining income taxed at lower progressive rates.

Long-term Capital Gains and Qualified Dividends

Long-term capital gains and qualified dividends have preferential tax rates, lower than ordinary income rates. These apply to profits from assets held over one year (e.g., stocks, real estate) and specific IRS-qualified dividends. For 2024, rates are 0%, 15%, or 20% based on taxable income. For example, a single filer in 2024 pays 0% up to $47,025 taxable income, 15% between $47,026 and $518,900, and 20% above $518,900. A $1,000,000 stock gain held for years would primarily face the 20% rate, resulting in a lower tax bill than ordinary income.

Other Income Streams

Lottery winnings are ordinary income, subject to progressive tax rates like wages. Inheritance is not subject to federal income tax for the recipient. However, the decedent’s estate may owe federal estate tax if its value exceeds the 2024 exemption of $13.61 million per individual.

Additional Federal Tax Considerations

Beyond standard income tax, other federal taxes increase the burden for high-income earners or those with significant investment income. These taxes fund specific government programs or apply to particular income types.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT) is a 3.8% tax on certain net investment income. It affects individuals, estates, and trusts with net investment income above specific thresholds. For 2024, NIIT applies if modified adjusted gross income (MAGI) exceeds $200,000 (single/head of household), $250,000 (married filing jointly/qualifying surviving spouse), or $125,000 (married filing separately). This tax covers interest, dividends, capital gains, rental/royalty income, and passive business/trading income.

Additional Medicare Tax

The Additional Medicare Tax is a 0.9% tax on earned income above certain thresholds. It applies to wages, self-employment income, and Railroad Retirement (RRTA) compensation. For 2024, thresholds are $200,000 (single), $250,000 (married filing jointly), and $125,000 (married filing separately). This tax is solely the taxpayer’s responsibility; employers do not pay a matching portion.

Self-Employment Tax

Self-employed individuals, like those with a $1,000,000 business profit, pay Self-Employment Tax. This covers Social Security and Medicare contributions. The rate is 15.3% (12.4% for Social Security, 2.9% for Medicare). For 2024, the Social Security portion applies to net self-employment earnings up to $168,600, while Medicare applies to all net earnings.

Reducing Your Tax Liability

Taxpayers can reduce federal income tax liability through deductions and tax credits. These tools significantly lower tax owed by reducing taxable income or directly decreasing the tax bill.

Deductions

Deductions reduce a taxpayer’s Adjusted Gross Income (AGI) or taxable income. Taxpayers choose between a standard deduction or itemizing. Itemized deductions allow subtracting eligible expenses from AGI if they exceed the standard amount. Common itemized deductions include state and local taxes (capped at $10,000) and mortgage interest (limited to $750,000 for newer mortgages, $1,000,000 for older). Charitable contributions can also be itemized. “Above-the-line” deductions, like traditional IRA or HSA contributions, directly reduce AGI. For 2024, the maximum IRA contribution is $7,000, plus $1,000 for those 50 and over.

Tax Credits

Tax credits are more impactful than deductions, directly reducing tax owed dollar-for-dollar. A $1,000 credit reduces the tax bill by $1,000, unlike a deduction whose value depends on the marginal tax rate. Federal tax credits support various activities. Examples include the Child Tax Credit, education credits, and clean energy credits. Eligibility often depends on income and specific criteria, but they can provide substantial savings.

State and Local Tax Implications

The total tax burden on a million dollars includes state and local taxes, significantly influencing the amount retained. These taxes vary widely across jurisdictions, creating a diverse tax landscape.

State Income Taxes

State income taxes are a primary variable. Some states, like Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming, have no statewide income tax, offering substantial savings for high earners. Other states use a flat tax rate, such as Colorado (4.40%), Illinois (4.95%), and Indiana (3.05%). Many states use a progressive system, similar to federal, with rates increasing as income rises; some top marginal rates exceed 10%. Residency is crucial, as states tax residents’ income and sometimes non-residents’ income earned within their borders.

Other State and Local Taxes

Other state and local taxes may impact a million dollars, depending on its use. Sales tax applies to goods and services; large purchases like luxury vehicles can incur substantial liability. Rates vary by state and locality, sometimes exceeding 9%. Property taxes are a consideration if real estate is purchased. Assessed by local governments based on property value, they represent an ongoing annual cost. Rates and assessment methods differ significantly by locality, requiring understanding before real estate investments.