I wanted to follow up on my last post about Obama’s proposal to limit the value of itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s to 28%, even if one pays a higher taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate. A lot of people have written in to ask, “How big a tax increase is this, and how does it compare to the expiration of the Bush tax cuts for high income earners?”
The answer: It depends. I’ve done a relatively simple analysis* looking at a few example high-income taxpayers. I use 2012 tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s because that’s the latest year that we can know for sure what they’ll be, even though these proposals likely wouldn’t be in effect until 2013 at the earliest. I look at tax bills under two scenarios: existing (current year) tax policies, and Obama’s proposal to let the Bush tax cuts expire for high-income taxpayers (above $200K for single filers and $250K for married filers), combined with his proposal to limit the benefit of itemized deductions to 28%. While I make some simplifying assumptions, these numbers should help to give an idea of the rough magnitude of the proposed policy changes:
Sample Tax Return #1
AGI: $240K, Filing Status: Married, No Children, Itemized Deductions: $43,200
|
Filing Status |
Married |
|
Kids |
0 |
|
AGI |
$240,000 |
|
Itemized Deductions |
$43,200 |
|
Tax Under Current Policy |
$40,755 |
|
Effective Tax Rate under Current Policy |
17% |
|
Tax Under Obama Plan |
$40,908 |
|
Effective Tax Rate under Obama Plan |
17% |
|
Tax Increase From Expiration of Bush Tax Cuts for High Income Earners |
$0 |
|
Tax Increase From 28% Limitation on Itemized Deductions |
$153 |
|
Total Tax Increase |
$153 |
Sample Tax Return #2
AGI: $500K, Filing Status: Single, No Children, Itemized Deductions: $90,000
|
Filing Status |
Single |
|
Kids |
0 |
|
AGI |
$500,000 |
|
Itemized Deductions |
$90,000 |
|
Tax Under Current Policy |
$118,931 |
|
Effective Tax Rate under Current Policy |
24% |
|
Tax Under Obama Plan |
$139,153 |
|
Effective Tax Rate under Obama Plan |
28% |
|
Tax Increase From Expiration of Bush Tax Cuts for High Income Earners |
$11,487 |
|
Tax Increase From 28% Limitation on Itemized Deductions |
$8,735 |
|
Total Tax Increase |
$20,222 |
Sample Tax Return #3
AGI: $1M, Filing Status: Married, Two Children, Itemized Deductions: $180,000
|
Filing Status |
Married |
|
Kids |
2 |
|
AGI |
$1,000,000 |
|
Itemized Deductions |
$180,000 |
|
Tax Under Current Policy |
$250,820 |
|
Effective Tax Rate under Current Policy |
25% |
|
Tax Under Obama Plan |
$306,133 |
|
Effective Tax Rate under Obama Plan |
31% |
|
Tax Increase From Expiration of Bush Tax Cuts for High Income Earners |
$38,389 |
|
Tax Increase From 28% Limitation on Itemized Deductions |
$16,925 |
|
Total Tax Increase |
$55,314 |
Sample Tax Return #4
AGI: $10M, Filing Status: Single, No Children, Itemized Deductions: $1,800,000
|
Filing Status |
Single |
|
Kids |
0 |
|
AGI |
$10,000,000 |
|
Itemized Deductions |
$1,800,000 |
|
Tax Under Current Policy |
$2,845,431 |
|
Effective Tax Rate under Current Policy |
28% |
|
Tax Under Obama Plan |
$3,502,153 |
|
Effective Tax Rate under Obama Plan |
35% |
|
Tax Increase From Expiration of Bush Tax Cuts for High Income Earners |
$482,687 |
|
Tax Increase From 28% Limitation on Itemized Deductions |
$174,035 |
|
Total Tax Increase |
$656,722 |
*I assume all income is wage income (and not dividends or capital gains, which is not entirely realistic.) We also ignore the AMT entirely. In the Obama plan, we assume the Bush tax cuts expire for upper-income taxpayers by increasing marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s to Clinton-era levels for income above $200K for singles and $250K for married filers, as well as the return of PEP and Pease limitations with higher phaseout thresholds.
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