Americans’ new tax rates depend on who they are and what they do

It also means that, whether you earn $100,000 or $100 million, your effective rate can be wildly different from your official tax bracket.

A lot depends on how you earn your money. The most obvious examples are new tax breaks for tipped income and overtime pay, which Trump insisted on including in the law. But those deductions come with limits, don’t apply to payroll levies and expire after four years. Far more economically significant are perks aimed at higher-end taxpayers, now made permanent.

Special Provisions

A lucrative 20% deduction for pass-through business owners, introduced in 2017 and scheduled to expire, will remain in the code while continuing to exclude the wealthy in legal, financial, health care and other service industries.

Private equity executives will keep paying lower rates than other financial professionals, through a loophole called carried interest that Trump had vowed to plug. Venture capitalists and startup founders will get to avoid taxes on millions of dollars of extra income, through a more generous version of the qualified small business stock, or QSBS, break.

The law boosts the cap on deductions for state and local taxes, or SALT, to $40,000 from $10,000, a change that favors affluent residents of states with high income tax rates, as well as homeowners with large property levies. But the $40,000 cap phases out for taxpayers earning more than $500,000 annually, and returns to $10,000 starting in 2030. Meanwhile, pass-through businesses will be allowed to skip the cap and continue deducting their full SALT through state-level workarounds.

For the 112 years there’s been a federal income tax, politicians have tried to complicate it with special provisions. A bipartisan reform law in 1986 pushed in the other direction, radically rewriting the code, removing exemptions and deductions and lowering rates so that investors, workers and others generally paid similar rates.

But then lawmakers began adding back special breaks to reward specific groups or encourage particular behaviors. One of the biggest is aimed at investors, who now pay a much lower rate on their long-term capital gains than workers pay on their wages. During former President Joe Biden’s term, Democrats failed to pass proposals narrowing that gap by boosting taxes on rich investors. They did, however, approve hundreds of billions of dollars in new tax breaks for clean energy.

‘Gradual Creep’

“It’s been kind of a gradual creep,” said Megan Jones, a tax attorney at Vedder Price in Los Angeles. “The tax code has increasingly incentivized certain types of income or certain types of behavior.”

The goal of the 2017 law’s authors, including former House Speaker Paul Ryan, was to simplify things, making it possible for most Americans to file a tax return the size of a postcard. To some extent, they succeeded.

By eliminating deductions and boosting the standard deduction, tax filing season got simpler for millions of Americans. The share of Americans taking the standard deduction on their 1040 returns, rather than itemizing deductions on a longer version, jumped to 88% by 2021, from 68% in 2017.

Next year should be different. The higher SALT cap will give many more Americans a reason to itemize again. Even deductions that don’t require itemizing to claim, like the tips and overtime provisions, will require new paperwork.

Starting this year, Americans can deduct up to $10,000 of auto loan interest annually through 2028. But only interest on new vehicles whose final assembly was in the US is eligible, so the Internal Revenue Service will need to lay out how taxpayers can prove that.

Because many of the new breaks come with income and size limits, knowing whether you qualify may require the sort of complex calculations only possible with special software.

“We’re pretty confident that we will be able to adapt,” says Miguel Burgos, a CPA at tax-preparation company TurboTax. It may be a few months before the IRS specifies how it’s all going to work in practice, he said, and filing season next year “may require some additional time in tax preparation and some additional information from taxpayers.”

The nonpartisan Penn Wharton Budget Model estimates the poorest 40% of Americans will be generally worse off over time, middle-income groups will mostly break even, while the biggest benefit, a median 2.9% boost to after-tax incomes by 2030, will go to those earning from about $400,000 to $1 million.

Those are averages, of course, and can vary widely depending on circumstances. An analysis by the Budget Lab at Yale University looked at “horizontal equity,” the extent to which taxpayers with similar earnings face similar tax burdens. It finds the new law undoes “around half of [the 2017 law’s] progress” toward more horizontal equity.