The higher-income Americans who may pay more taxes under Trump
If you’re wealthy, then you stand to benefit from Donald Trump’s tax plan… right? That’s the theme that most analyses of the president-elect’s tax plan have focused on: The rich will pay less. But there are some higher-income Americans who may wind up paying more taxes under Trump than they have in past years.
If your taxable income falls into one of these groups, then you are one of them (taxable income here refers to your gross income — not adjusted gross income, which includes deductions or exemptions):
— Individual tax filer: Between $112,500 and $190,150
— Married or joint filers: Between $225,000 and $231,450
Taxpayers reporting income in those ranges would see their marginal tax rate rise from 28% under current policy to 33% under the plan Trump proposed during his campaign. (Your marginal tax rate is the amount of tax paid on your next dollar of income, as you move into a higher tax bracket. It is not your overall, or effective, tax rate, which is typically lower.)
That means a single filer earning $190,150 (and taking the standard deduction) could pay $3,000 more in taxes under Trump’s proposed plan, according to personal finance writer Sam Dogen. A single filer making $130,000 could pay $875 more in taxes, and joint filers who report gross income of $231,450 could see their taxes go up by about $320.
If you’re doubting if someone with income in those ranges is “wealthy,” consider that the median household income in the U.S. is $55,775 and, even in expensive San Francisco, it’s $90,500.
Stuck in the middle?
The hallmark of Trump’s plan, which the Tax Foundation has estimated could cost as much as $6 trillion over the next decade in lost tax revenue, is lowering the number of tax brackets from seven to three: 12%, 25% and 33%. This would squeeze many taxpayers into a lower bracket than their current one, and some would move into a higher marginal tax bracket.
This graphic from HowMuch visualizes that squeezing (it calculates tax-bracket changes assuming filers use the standard deduction, which would increase under Trump’s plan). As it shows, the richest taxpayers at the top see gains, and the poorest taxpayers at the bottom get hurt. But there is one slice of wealthy taxpayers in the upper brackets that would also get hurt — or, at least, benefit the least from the changes.
The number of people in this bracket is likely very small — less than 2% of American households, according to 2013 Internal Revenue Service data. In total, about 20% of all American households would see their taxes rise under Trump’s plan, according to the Tax Policy Center.
‘A little causality of simplification’
Alan Cole, an economist at the Tax Foundation, says that most people assume reducing the number of tax brackets is one way to simplify the U.S.’s extraordinarily complex tax code — which has been a rallying cry for politicians, particularly on the Republican side of the aisle. The tax code contains about 4 million words — longer than the Bible, as Sen. Ted Cruz famously noted.
But, Cole says, reducing brackets is a minor simplification of the code, and one that won’t have much of an effect.
Advocates for simplifying the tax code suggest that, to make a real difference, legislators would need to also turn their attention to the earned income tax credit, capital gains and education tax benefits, just to name a few issues.
Of course, simply belonging to this relatively well-off, but newly tax-disadvantaged bracket doesn’t guarantee your taxes will increase. Trump’s plan would also add a new deduction for childcare expenses, plus other benefits for child and dependent care, and eliminate the alternative minimum tax and estate and gift taxes, all of which could affect your rate.
And Trump’s proposed plan is just that — a proposal, not policy, with many variables yet to come into focus.
But anytime the number of tax brackets is reduced, there will be winners and losers at all levels of the income scale. And those who fall into this camp would see less benefit — possibly considerably less — than any other upper-income bracket.
“When reducing the number of brackets, you don’t want to have too much of a tax cut, but you also want to try to approximate something like the original curve,” Cole said. “The result of that means sometimes if you’re not super generous all the way across, you’re going to end up with a tax increase for some. It’s a little causality of simplification.”
When merging tax brackets, “there is no way for everybody to win and for there to not be losers,” said tax attorney Mark Allison, of Caplin & Drysdale.
Allison said that, for now, taxpayers shouldn’t worry about the potential upheaval coming.
“Do what you would do without regard to potential tax changes,” he said. “If you need to sell an asset today, sell it. If you want to ride things out, ride things out. Don’t let potential tax issues control your financial plans.”
For more information on positioning yourself for tax savings under Donald Trump’s tax plan, see Bill Bischoff’s tips for reducing your tax bill.