In 2021, taxpayers reported a staggering $14.8 trillion of total income on their tax returns. This income was derived from various sources, with wages and salaries accounting for about 61 percent ($9.0 trillion). Retirement accounts, such as 401(k)s and pensions, were significant sources of capital income for the middle class, contributing nearly $1.3 trillion of income in 2021. Combined with taxable Social Security benefits of nearly $413 billion, retirement income accounted for nearly $1.7 trillion of income in 2021.
Business income was another substantial component of reported personal income. Businesses that report income taxes through the individual income tax system, like S corporations, sole proprietorships, and partnerships, accounted for nearly $1.5 trillion of income in 2021. Investment income, consisting of net capital gains, taxable interest, and ordinary dividends, accounted for nearly $2.6 trillion of income in 2021, more than both business income and taxable retirement income.
The COVID-19 pandemic and subsequent economic recovery significantly altered several categories of income from 2020 to 2021, including unemployment compensation and capital gains. The individual income tax is the federal government’s largest source of revenue, with more than 160 million individual income tax returns filed for tax year 2021.
The composition of income varies with income level. For example, retirement income is most important as a source of income for taxpayers making between $50,000 and $200,000, comprising 17 percent to 18 percent of total income. Business income and investment income held outside of retirement accounts are most important to higher-income taxpayers, while wages and salaries comprise the largest share of income for lower-income taxpayers.
The COVID-19 pandemic had a profound impact on economic stability in the United States, and it can be seen in the 2021 individual income tax return data. Personal income increased by 17 percent from 2020 to 2021, compared to 5 percent growth from 2019 to 2020, driven largely by capital gains realizations reaching a 40-year record high. The aggregate growth, however, masks different experiences across income groups.
Understanding the composition of personal income is crucial for making informed financial decisions and fulfilling tax obligations. As we navigate the economic aftermath of the pandemic, it’s more important than ever to stay informed and understand the implications of these changes on our financial health.
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