![]() ![]() Raise all tax rates on ordinary income in the top four brackets (24 percent and over from 2018 through 2025, and 28 percent and over after 2025) by 1 percentage point.Raise all tax rates on ordinary income (income subject to the regular rate schedule) by 1 percentage point.This option consists of three alternative approaches for increasing statutory rates under the individual income tax. Those temporary provisions, which boost taxable income on net, include the repeal of personal exemptions, the limitation of certain itemized deductions, and an increase in the standard deduction. Taxable income is projected to grow at a rate similar to gross domestic product between now and 2028, despite a drop in 2026, when temporary provisions of the 2017 tax act that affect the amount of income that is taxable are scheduled to expire. Almost a quarter ($1.6 trillion) of that income was taxed at the four highest rates, and about a tenth ($750 billion) was taxed at the two highest rates. In 2016, the IRS reported that $6.6 trillion in income was taxed at ordinary rates, generating $1.4 trillion in revenues from 114 million returns. The 2017 tax act significantly limited the reach of the AMT for calendar years 2018 through 2025 by increasing the amount of income that is exempt from the AMT and by limiting the deduction for state and local taxes under the regular income tax. Households must calculate the amount they owe under both the AMT and the regular income tax and pay the larger of the two amounts.) However, the AMT does not affect most of the highest-income taxpayers because the highest statutory rate under the AMT is only 28 percent, and many deductions allowed under the regular income tax are also allowed under the AMT. The AMT works in parallel with the regular income tax it is similarly structured but has fewer exemptions, deductions, credits, and rates. (Over certain income ranges, the effective rate on each additional dollar of income is higher than the statutory rate. Taxpayers who are subject to the alternative minimum tax (AMT) face statutory rates of 26 percent and 28 percent. Income from all capital gains and dividends, along with other investment income received by higher-income taxpayers, is also subject to an additional tax of 3.8 percent. ![]() Income in the form of dividends and long-term capital gains (those realized on assets held for more than a year) is taxed under a separate rate schedule, with a maximum statutory rate of 20 percent. Statutory Tax Rate on Ordinary Taxable Income (Percent) Starting Points for Tax Brackets (2018 dollars) Like the tax rates, the tax brackets will revert to those in effect under pre-2018 law (adjusted for inflation using the chained CPI-U) in 2026. The 2017 tax act permanently changed the measure used to adjust for inflation from the consumer price index for all urban consumers (CPI-U) to a "chained" version of the CPI-U, which grows more slowly. The starting points for those income ranges are adjusted, or indexed, each year to include the effects of inflation. For 2018, for example, a person filing singly with taxable income of $40,000 would pay a tax rate of 10 percent on the first $9,525 of taxable income, 12 percent on the next $29,175, and 22 percent on the remaining $1,300. Tax brackets-the income ranges to which the different rates apply-vary depending on taxpayers' filing status (see table below). Beginning in 2026, the statutory rates will be 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.Īs specified by the tax code, different statutory tax rates apply to different portions of people's taxable ordinary income. (Taxable ordinary income is all income subject to the individual income tax other than most long-term capital gains and dividends, minus allowable adjustments, exemptions, and deductions.) At the end of 2025, nearly all of the modifications to the individual income tax system made by the 2017 tax act are scheduled to expire, and the rates will revert to those under pre-2018 tax law. For calendar years 2018 through 2025, taxable ordinary income earned by most individuals is subject to the following seven statutory rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. ![]() The 2017 tax act included a number of temporary changes to the individual income tax. ![]()
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