Millionaire Tax Rates: Federal and State Taxes

The term “millionaire tax” is a colloquialism, not an official designation for a single tax. It describes the combination of higher tax rates at both the federal and state levels that apply to individuals with high annual incomes. For tax purposes, this refers to someone earning over $1 million in a single year, rather than an individual with a net worth of that amount. The tax liability for these individuals is not determined by one flat rate but is the result of several different taxes and calculations applied progressively. This layered approach means the total tax paid can differ significantly based on income sources and geographic location.

Federal Income Tax on High Earners

The United States employs a progressive tax system, meaning that as income rises, it is taxed at increasingly higher rates. This system is built on marginal tax brackets, which are income ranges taxed at specific rates. For 2025, there are seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Only the portion of income that falls into a specific bracket is taxed at that bracket’s rate. For example, a single individual with $1.2 million in taxable income in 2025 has their income fill each tax bracket sequentially. The first $11,925 is taxed at 10%, the income from $11,926 to $48,475 is taxed at 12%, and so on, until the income exceeding $626,350 is taxed at the top rate of 37%.

This leads to a distinction between a marginal tax rate and an effective tax rate. The marginal rate is the rate paid on the last dollar of income earned—in the previous example, 37%. The effective tax rate is the total tax paid divided by total taxable income, providing a more accurate picture of the overall tax burden. For the single filer with $1.2 million in income, their calculated federal income tax would be approximately $401,020, resulting in an effective federal rate of about 33.4%.

The same principle applies to other filing statuses, though the income thresholds for each bracket differ. For those married filing jointly in 2025, the 37% bracket begins at taxable income over $751,600, and for heads of household, it starts at over $626,350.

Additional Federal Taxes for High Earners

Beyond the standard progressive income tax, high earners face additional federal taxes that are triggered once income surpasses certain thresholds. These surtaxes apply to specific types of income and are calculated separately from the regular income tax liability.

Net Investment Income Tax

One additional tax is the Net Investment Income Tax (NIIT). This is a 3.8% tax levied on the lesser of either a taxpayer’s net investment income or the amount by which their Modified Adjusted Gross Income (MAGI) exceeds a set threshold. These MAGI thresholds are $200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for married individuals filing separately.

Net investment income is broadly defined and includes interest, dividends, annuities, royalties, and rents not derived from an active trade or business. It also encompasses net gains from the sale of stocks, bonds, and mutual funds.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income individuals who claim numerous deductions still pay a minimum amount of tax. Taxpayers must calculate their tax liability under both the regular income tax rules and the AMT rules, and then pay the higher of the two amounts. The AMT calculation adds back certain tax preference items and deductions that are allowed under the regular system.

Common items that can trigger the AMT include large deductions for state and local taxes, certain interest from private-activity bonds, and the exercise of incentive stock options. For 2025, the AMT exemption amounts are $88,100 for single filers and $137,300 for married couples filing jointly. These exemptions begin to phase out for high earners, starting at an Alternative Minimum Taxable Income of $626,350 for single filers and $1,252,700 for joint filers. The AMT has its own tax rates of 26% and 28%.

Higher Capital Gains Rates

While long-term capital gains—profits from assets held for more than one year—are taxed at preferential rates, these rates also increase with income. For 2025, the capital gains rates are 0%, 15%, and 20%. A high-income earner will likely pay the 20% rate, which applies to taxable income over $533,400 for single filers and over $600,050 for those married filing jointly.

These income thresholds for capital gains are based on overall taxable income, not just the gain itself. Therefore, a large salary can push an otherwise modest capital gain into the highest tax bracket. Furthermore, these gains are also included in the calculation for the Net Investment Income Tax, potentially subjecting them to the additional 3.8% NIIT for a combined top federal rate of 23.8% on long-term capital gains.

State-Level Millionaire Taxes

In addition to federal obligations, taxpayers must navigate their state’s tax system, many of which also feature a progressive structure. Several states have enacted specific tax provisions, often called a “millionaire’s tax,” which impose a higher marginal rate or a surtax on income exceeding a certain high-income threshold, typically at or around $1 million. The presence of these high marginal rates at the state level increases the overall tax burden for high-income individuals residing in these jurisdictions.

A number of states have top marginal rates that specifically target high earners.

• California: The top marginal rate can reach 14.4%, which combines the state’s 13.3% top income tax rate—including a 1% surtax on income over $1 million—and a 1.1% payroll tax with no income limit.
• New York: The tax system is steeply progressive, with a top rate of 10.9% applied to income over $25 million, and several brackets leading up to that level for those earning over $1 million.
• New Jersey: A top rate of 10.75% applies for income over $1 million.
• Hawaii: The top rate of 11% applies to taxable income over $200,000 for single filers.
• Massachusetts: A 4% surtax on income over $1 million is imposed on top of its flat 5% income tax, effectively creating a 9% rate on that income.

Interaction of Federal and State Taxes

The relationship between federal and state tax systems is governed by the rules for deductions. Taxpayers who itemize deductions on their federal income tax return can deduct certain state and local taxes they have paid, including state income or sales taxes, as well as property taxes. This deduction reduces their federally taxable income, thereby lowering their federal tax bill.

A cap on the State and Local Tax (SALT) deduction was introduced by the Tax Cuts and Jobs Act of 2017. Currently, the total amount that a taxpayer can deduct for all state and local taxes combined is limited to $10,000 per household per year ($5,000 for those married filing separately). This limitation is in effect through the end of 2025 unless extended by Congress.

This $10,000 cap has a pronounced impact on high-income taxpayers, particularly those living in states with high income and property taxes. For example, an individual in a high-tax state might pay well over $100,000 in state income and property taxes but is limited to deducting only $10,000. This restriction increases their federal taxable income, meaning a larger portion of their income is subject to federal taxation. This dynamic means that high earners in high-tax states experience higher federal taxes on the amounts paid in state and local taxes above the $10,000 limit.