Is there an upper-middle-class tax increase on the way? The 2016 election caused a stir in more ways than one, and it’s left many Americans wondering how their bottom lines will be impacted under President-elect Trump. One of the key issues of concern is what Trump’s income tax plan will mean for workers. (For more, see Donald Trump’s Tax Plan: Who Will Love It.)
An Upper-Middle-Class Tax Increase May Be Coming
Under Trump’s agenda, the current seven-bracket system would be replaced with just three tax brackets: 12%, 25% and 33%. While that may simplify how Americans are taxed to a degree, it could complicate things for certain upper-middle-class earners. According to research from the Urban Institute, that term applies to households with an annual income of $100,000 to $349,999. At the end of the day some of those filers could find themselves shelling out more to Uncle Sam.
Tax Bracket Changes: Who Stands to Get Crunched?
If Trump’s tax plan were to take effect, it would create new income baselines for taxation. Those at the lower end of the earnings scale would likely have an effective tax rate of zero, but for those bringing in a bigger paycheck, the result could be quite different.
The 12% tax rate would apply to single filers earning less than $37,500. Those earning between $37,500 and $112,500 would fall into the middle range, at 25%. At the upper end – paying 33% in tax – would be those earning more than $112,500 annually. The income limits are doubled for married couples filing jointly.
So what does that mean for those who fit into the upper-middle-class-income range?
Married Couples. Under Trump’s plan, married couples would have to earn $225,000 or more to be taxed at the highest rate. That’s $6,450 less than the current floor of $231,450, so some families could end up in a higher bracket than they are in now.
Singles. The picture looks starker for well-to-do single filers. Under the current tax structure for 2016, a single filer would have to earn at least $190,150 or more to venture into the 33% tax rate territory. Those earning between $91,150 and $190,150 are taxed at the 28% rate. That means that someone could earn as much as $77,650 less ($190,150 to $112,500) than the current qualifying limit for 33% and still pay that same 33% tax rate under Trump’s plan.
According to data from the Internal Revenue Service (IRS), approximately 2.2 million single filers and 5.3 million married couples filing a joint return were taxed at the 28% rate in 2014. By comparison, 446,000 single filers and 2.5 million married couples reported enough income to trigger the 33% tax rate. If Trump’s tax policy were to take hold, those numbers could shift substantially. (For more, see How Federal and State Tax Brackets Work.)
Looking Ahead to 2017
The IRS has already established updated tax brackets and rates for 2017. Single filers making between $91,900 and $191,650 will pay 28% in tax, while those earning $191,650 to $416,700 will snag the 33% rate. Married couples filing jointly will pay the 28% rate if they earn between $153,100 and $233,350. The 33% rate kicks in once their income surpasses $233,350, with the upper limit set at $416,700.
Interestingly, those brackets would actually allow some upper-middle-class filers who are right on the cusp with their income to slip down a notch in terms of their tax rate. For example, a single filer who made more than $190,150 but still under $191,650 in 2016 would drop back from 33% to the 28% tax rate under the 2017 guidelines with the same income.
The Bottom Line
Trump’s tax plan remains up in the air, and there’s no certainty as to whether it will be pushed through or what its final shape will be. In the meantime, however, upper-middle-class earners should be giving thought to how their tax liability may be impacted down the line. Unlike the wealthiest Americans, who would drop back to the 33% bracket from 35% or 39.6%, some upper middle class taxpayers may end up in a higher bracket than they are under the current system.
Finding ways to reduce taxable income, such as making deductible contributions to a health savings account or deferring part of your salary into an employer-sponsored retirement plan can go a long way toward lowering your tax bill.