Who’s Really Paying Federal Income Taxes? A Clear Look at the Top 1% and Top 5%
When conversations about taxes come up, the focus is almost always on the “top 1%.” While that group does pay a large share, it doesn’t tell the full story.
To really understand who is funding the U.S. tax system, you need to look at a broader group: the top 5% of earners. This group includes many professionals, executives, and business owners—and they carry the majority of the federal income tax burden.
According to data from the Tax Foundation based on IRS filings, the U.S. income tax system is highly progressive, with tax responsibility heavily concentrated among higher earners.
The Top 1%: A Large—but Not Majority—Share
The top 1% represents the highest earners in the country, and their contribution is significant:
They earn about 20.6% of total income
They pay approximately 38.4% of all federal income taxes
This means the top 1% pays nearly double their share of income in taxes—an important indicator of how progressive the system is.
The Bigger Story: The Top 5%
While the top 1% gets most of the attention, the broader top 5% provides a clearer picture of how the system is funded:
The top 5% earns roughly 35–36% of total income
They pay just over 60% of all federal income taxes
Compare that to the bottom half of taxpayers that contribute just 3.3% of total income taxes
In practical terms, this means that roughly 1 in 20 taxpayers funds the majority of federal income tax revenue.
What It Takes to Be in the Top 5%
One of the most common misconceptions is that this group is made up only of ultra-wealthy households.
In reality, the threshold is much lower than many expect.
For the 2023 tax year, roughly $250,000 in adjusted gross income (AGI) places you in the top 5% of taxpayers. AGI includes more than just salary. It reflects total taxable income, including:
Wages and bonuses
Business income
Investment income such as dividends and capital gains
For many dual-income households, experienced professionals, and small business owners, this level of income is attainable—and often already a reality.
Why This Matters
If your income is near or above this level, the implications are meaningful.
You are no longer simply participating in the tax system—you are helping fund the majority of it. As income increases, so does your effective tax rate, your exposure to future policy changes, and the importance of proactive planning.
At this level, taxes often become one of the largest expenses you face—frequently exceeding housing costs, lifestyle spending, or even business expenses.
Strategies to Reduce the Tax Burden
Because the tax system is so concentrated among higher earners, thoughtful tax planning can have a meaningful impact over time.
A few key strategies stand out:
Tax-efficient investing can reduce unnecessary tax drag by favoring long-term capital gains over short-term income and minimizing portfolio turnover.
Asset location ensures that tax-inefficient investments—such as bonds or high-turnover strategies—are held in tax-advantaged accounts, while more efficient assets are held in taxable accounts.
Income and gain timing allows for greater control over when taxes are realized, helping smooth liabilities and reduce lifetime tax exposure.
Maximizing tax-advantaged accounts, including retirement plans and Health Savings Accounts, can provide both immediate tax savings and long-term compounding benefits.
Planning for Rising Tax Risk
One reality worth acknowledging is that the current system already relies heavily on high earners.
The top 5% pays the majority of federal income taxes today—and that makes this group the most likely target for future tax increases.
With federal deficits, policy uncertainty, and scheduled tax provisions set to change in the coming years, there is a reasonable case that tax rates on higher earners could rise over time.
This is where forward-looking strategies become especially valuable.
Even for high earners, tools like Roth IRA conversions can play a role in managing long-term tax exposure. While they require paying taxes today, they can help create tax-free income in the future—providing flexibility if rates increase later.
The key is not to overcommit, but to evaluate these opportunities strategically over time.
Final Thought
Building wealth is only part of the equation. In a system where tax burdens are concentrated at the top, keeping more of what you earn requires deliberate, tax-aware planning.
At Stordahl Capital Management, we help clients align investment strategy with tax efficiency—so more of what they earn stays working for them over time.
Questions? If you’re in or approaching the top 5% of earners and want to be proactive about future tax changes, we’d be happy to help. We offer a complimentary 15-minute call to discuss your concerns and explore how we can assist you.
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This material was written in collaboration with artificial intelligence (ChatGPT) and derived from sources believed to be correct.
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