Composition of Income Reported on Tax Returns

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

© TAX ANALYSTS. Reprinted with permission.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The composition of income reported on tax returns changes markedly as income increases. On most tax returns, wages and salaries are the dominant source of income. Capital gains become more significant at higher incomes, but even at adjusted gross income (AGI) of $200,000 to $500,000, they only averaged about 12 percent of income in 2000.

At very high incomes, however, capital gains dominate. Those with incomes of $10 million or more report capital gains equal to 57 percent of total income. For the 400 taxpayers with the highest incomes (AGI exceeding $86.8 million), capital gains make up more than 71 percent of income, while wages comprise less than 17 percent.

For low- and moderate-income households, pensions, annuities, IRA distributions and Social Security are the second largest income category after wages. They comprise 17 percent of income reported by those with AGI less than $25,000, and 10 percent or more of the incomes up to AGI of $500,000. These numbers include returns of elderly individuals, for whom retirement income looms large.

Business income, interest, and dividends are also a growing component of income as income rises to about $2 million of AGI. But these elements decline in importance as income rises higher.

The stock market bubble distorts these data somewhat. But earlier research based on a 10-year panel of returns shows a similar pattern in the composition of average income.¹ Also, preliminary data for 2001 show that capital gains made up 21 percent of income for those with AGI exceeding $200,000 (the highest income reported) compared with 27 percent in 2000.

1 See Leonard E. Burman and Peter Ricoy, "Capital Gains and the People Who Realize Them," National Tax Journal, September 1997, pp. 427-451.

The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, provides independent, timely, and accessible analysis of current and emerging tax policy issues for the public, journalists, policymakers, and academic researchers. For more tax facts, see http://www.taxpolicycenter.org/taxfacts.

Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact [email protected].

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.