Tax cap and high-earner surtax

Summary#

This bill would change how federal income tax is calculated for many people. It would do two main things: (1) cap the regular income tax for many low- and middle-income taxpayers based on a cost-of-living exemption, and (2) add a new surtax on very high earners. The broad goal in the bill’s language is to lower taxes for working Americans and raise extra revenue from high-income taxpayers.

• Main change (low/middle income): For "qualified individuals" the regular tax cannot be more than 25.5% of the taxpayer’s modified adjusted gross income (MAGI) above a cost-of-living exemption. The exemption is based on a $46,000 “annualized cost-of-living wage” that is adjusted for inflation; joint filers get 200% of that amount and heads of household get 140%.
• Main change (high income): A new surcharge would apply to noncorporate taxpayers: 5% on MAGI over $1,000,000 up to $2,000,000; 10% on income from $2,000,000 to $5,000,000; and 12% on income over $5,000,000. These thresholds are indexed for inflation and are increased by 50% for joint filers.
• Definitions that matter: The bill defines special versions of MAGI for each rule. The low/middle-income cap adds back certain excluded foreign income and excluded Social Security portions. The surcharge uses a MAGI that reduces AGI by certain investment interest deductions.
• Timing: Both changes apply to tax years beginning after December 31, 2025.
• Special rules: The surcharge excludes certain charitable trusts and treats taxpayers living abroad differently when applying thresholds. The surcharge is not counted as “tax imposed by this chapter” when computing tax credits or the alternative minimum tax, according to the bill text.

What it means for you#

• Workers / Low- and middle-income taxpayers

  • If your income fits the bill’s definition of a “qualified individual,” your regular income tax would be limited so it cannot exceed 25.5% of your income above the cost-of-living exemption. This could lower your federal income tax compared with current law, depending on your situation.
  • The cost-of-living exemption is roughly $46,000 (adjusted for inflation) for a single filer, about $92,000 for married joint filers, and about $64,400 for heads of household (these are the bill’s starting amounts before inflation adjustments).
  • The bill adds back certain amounts (like excluded foreign earned income and parts of Social Security benefits) when calculating eligibility and the cap. That affects some taxpayers who currently exclude those amounts.

• Married couples filing jointly

  • Joint filers get a larger cost-of-living exemption (200% of the single amount). The surtax thresholds for joint filers are increased by 50% (so the dollar amounts are higher for joint returns).

• High earners

  • Individuals with modified AGI above $1 million would pay an extra surtax calculated in tiers (5%/10%/12%). This surtax is in addition to regular income tax and other taxes.

• People living abroad

  • The bill reduces the surcharge thresholds for taxpayers who exclude foreign-earned income under the tax code by the amount of that exclusion (with an offset for certain disallowed deductions). That can make the surcharge apply sooner for some people living abroad.

• Trusts and charities

  • Certain charitable trusts are exempt from the surcharge.

• Taxpayers with investment interest

  • The surcharge uses a special MAGI that subtracts certain investment interest deductions; that changes the base used to decide whether the surtax applies.

• Tax credits and the AMT (alternative minimum tax)

  • The bill says the new surcharge will not be counted as "tax imposed by this chapter" when calculating the amount of any credits or for the alternative minimum tax. The practical effect of that change is not fully detailed in the bill.

Expenses#

No publicly available information.

• The bill text does not include an official cost estimate or fiscal note in the material provided.
• Likely fiscal effects could include reduced revenue from the lower tax cap for qualifying taxpayers and increased revenue from the high-income surcharge, but the bill gives no numbers or net estimate.
• The IRS would likely face administrative and IT work to implement the new calculations (new MAGI definitions, CPI indexing, and separate surcharge computation). The bill does not estimate those costs.
• Taxpayers and tax preparers may face some additional compliance time to apply the new rules and compute the special MAGI amounts; no cost estimates are included.

Proponents' View#

• The bill appears intended to reduce tax burdens for many working Americans by limiting how much regular income tax they pay on income needed for basic living expenses (using a cost-of-living exemption).
• The bill appears intended to target additional revenue at very high earners through a new surtax with graduated tiers, making the overall tax changes more progressive.
• Indexing the exemption and surcharge thresholds to CPI-U (Consumer Price Index for all urban consumers) aims to keep amounts aligned with inflation over time.
• The bill creates clear dollar-based thresholds and simple percentage caps and rates, which supporters may argue is straightforward to apply once the new definitions are built into tax forms.

Opponents' View#

• One concern is that the bill text does not include a fiscal estimate, so the net revenue effect and the impact on the federal budget are unclear.
• The bill creates multiple special definitions of “modified adjusted gross income” used for different parts of the law. This may increase complexity for taxpayers and for IRS processing and could lead to disputes about the right calculation in some cases.
• It is unclear how the tax cap interacts with other parts of the tax system in practical terms, such as withholding, refundable credits, payroll taxes, and state income tax rules.
• The special treatment that excludes the surcharge from the calculation of tax credits and the alternative minimum tax could produce unexpected interactions; the bill does not explain all those consequences.
• The bill sets a dollar base ($46,000) from which indexing starts. That choice of base year and amount may be disputed, and the bill does not explain the policy reasons for that specific figure.