How Tax Reform Could Squeeze The Middle Class

Here’s what we know about the details of the tax reform plan: almost nothing.

Powerful lawmakers are promising at least a framework for the overhaul by the end of the month. The broad goals are lower rates for corporations and individuals, a simpler tax code with fewer brackets, and the elimination of the estate tax and the alternative-minimum tax.

Sound good? Beware. 

If you save for retirement or itemize your tax deductions, you could end up paying thousands of dollars more after tax reform than you do now. To help pay for promised cuts, President Donald Trump and Republicans in Congress are trying to raise revenue elsewhere. 

And the best place to get this money may be the millions of Americans who use deductions and other such strategies to lower their tax bills.

Upper-middle-class taxpayers in particular could face a triple whammy. On the table are limits on—or even the elimination of—three of their favorite tax perks: deductions for mortgage interest and for state and local taxes and the ability to make pre-tax 401(k) retirement contributions.

These perks are popular with other taxpayers, too. Except for the very poor, Americans of all income levels can use 401(k)-style plans to lower their tax bills and save for retirement. The mortgage and local tax deductions are useful to the 30 percent of filers who itemize their tax returns. That includes 39 percent of filers earning $50,000 to $75,000 a year, 56 percent of those making $75,000 to $100,000, 77 percent earning $100,000 to $200,000, and 90 percent or more of those making $200,000-plus, Internal
Revenue Service data show.

To figure out how much is at stake, we asked the Tax Institute at H&R Block to run some numbers. We looked at several hypothetical taxpayers with six-figure salaries, examining how much each one gains, and stands to lose, from tax provisions now under scrutiny.

Our five imaginary taxpayers are single homeowners under age 50 with salaries of $100,000, $200,000, $300,000, $400,000, and $500,000, with typical financial profiles for those income levels. They report some investment income in addition to their salaries, donate 5 percent of their salary to charity, and live in California, a state with a relatively high income tax.

Here’s what we found.