In our scenarios, the wealthiest three taxpayers, making $300,000 or more, are affected by the AMT because they take big deductions for SALT, mortgage interest, and charitable contributions. The AMT costs them each several thousand dollars a year. Eliminating it would help these taxpayers offset the loss of perks like the SALT.
Keep in mind, though, that Congress could kill the AMT but replace it with other provisions, probably simpler, that also limit deductions.
Lower rates
Another way Congress could help out wealthy taxpayers is by lowering their tax rates. Here again, the details matter.
For example, don’t confuse your overall rate with your marginal rate. Your marginal rate rises along with your income, as you pay different tax rates on different bands of income. The tax bracket your final dollars of income fall into is called your marginal tax rate. In our progressive tax system, the overall tax rate you pay can be much lower than your marginal rate. Research shows taxpayers often get this wrong. What ultimately matters, after tax reform, is your overall rate.
One idea being floated is a doubling or tripling of the standard deduction, an amount by which every taxpayer can lower their tax bills without itemizing. That could be a boon to upper-middle-class taxpayers who have relatively few deductions to make because they don’t have a mortgage, they live in a low-tax state, or they don’t contribute much to charity.
For affluent homeowners in high-tax states with lots of deductions, however, tax reform could be painful.Have personal finance questions or lessons to share? Join Money Talks, the new Facebook community from Bloomberg News.
This article was provided by Bloomberg News.