Albert Einstein quipped that the most complex math in the world is on your income tax return. With all the recent discussion about tax reform dominating the news, we thought it would be helpful to consider President Trump’s plan as it affects your personal finances. So we created a new viz to help clarify the situation.
Our numbers come from the Tax Policy Center, a non-partisan outfit of experts who crunch the numbers behind various tax proposals. They help people understand how complex fiscal policy affects their particular situations. It’s critical to understand how this type of analysis depends entirely on a set of assumptions. For example, they assume that the standard deduction will be raised to $12,000 for single filers and $24,000 for married couples. These numbers are very much open for negotiation. Simply put, nobody knows what the final deal will look like.
That being said, there are two things to remember about taxes. First, the U.S. has a progressive income tax system. That means these brackets are pegged to specific income levels, not your entire income. For example, if you make $38,000 (enough to be taxed at the marginal rate of 25%, which starts at $37,950), you only pay 25% on exactly $50. Second, there’s been a lot of discussion about eliminating tax deductions, like for mortgage interest, while lowering overall rates. This only matters if you are the lucky 1 out of the 3 people who actually itemize their tax deductions.
Our viz shows that Trump’s tax plan has mixed results. The median family income is about $59,000, which suggests that the average family will see a marginal tax cut from 15% to 12%. On the other hand, the poorest taxpayers in the lowest bracket will see a net increase in their tax bill, up from 10% to 12%. The situation is very similar at the other end of the tax bracket. Households making over $470,700 will see a net reduction in their tax bill from 39.6% to 35%. Folks currently paying a 33% marginal rate will likewise see an increase to 35%, but that doesn’t seem like a big deal if you’re already making five times the national average.
To summarize all of this, it’s fair to say that the middle and upper-middle classes will see modest benefits from Trump’s tax proposal (as long as they aren’t at the 33% rate). But the richest taxpayers will also see substantial gains in their net income levels, and the very poorest will lose the most.
Benjamin Franklin allegedly said that there are only two things certain in life: death and taxes. We can also be certain that the tax reform package will continue to change as the President cuts deals with Congress. So stay tuned, because the situation will undoubtedly change again before it’s all done.
Source: Table 1.1
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