Question

According to projections for 2016 by the Tax Policy Center, the 20 percent of U.S. taxpayers who make the highest incomes

Answer 1

The income tax schedule for taxpayers has seven brackets, ranging from a low ordinary tax rate of 10% to a peak ordinary tax rate of 39.6%.

Nearly 42.2 million taxpayers had a peak marginal tax bracket of 15% in 2013, meaning (based on the income ranges from 2013) the most popular tax range had single individuals with adjusted gross incomes of between $8,925 and $36,250, or joint filers between $17,850 and $72,500.

What might be surprising is that the often left out 0% tax bracket came in a very close second, with nearly 36.9 million tax filers. These individuals and joint filers were able to get their income down to zero thanks to tax credits and deductions. In particular, the Earned Income Tax Credit is a valuable tool for lower-income working Americans, and it's easily the most overlooked credit. The IRS estimates that roughly 25% of taxpayers eligible for the EITC fail to claim it, either because the rules are too complicated, or they're unaware they qualify because they have zero taxable income and fail to file a tax return.

In total, 77% of American households, per the Tax Foundation, fall into the 15% tax bracket or lower, yet, according to the Tax Policy Center, the top 20% of income earners are responsible for paying 69% of all federal income taxes.

However, big changes could be waiting in the wings for taxpayers in the coming months. As Donald Trump readies to take the Oval Office, taxpayers prepare for what could be a major shakeup to the seven-bracket tax schedule.

One of the more interesting aspects of this tax proposal is that it was revised in August 2016 to the 12%/25%/33% proposal we see now from Trump's original four-tier approach of 0%/10%/20%/25%. Why the change? Trump is eager to see individual income taxes cut for a majority of Americans, so he adopted the 12%/25%/33%, three-tier proposal offered previously by House Republicans. If the president and House are on the same page, it's simply a matter of getting the Senate on board to enact individual income tax reform. This still doesn't guarantee that reforms are coming, but it presumably improves the chances of tax reforms passing.

Furthermore, Trump has plans to do away with the laundry list of exemptions taxpayers currently enjoy. With the exception of the mortgage interest deduction and charitable giving deduction, Trump would essentially eliminate itemized deductions and simply fatten the standard deduction in return. In 2017, the standard deduction for single filers and joint filers is $6,350 and $12,700, respectively. If Trump gets his way, the standard deduction for single filers would vault to $15,000, and it would leap to $30,000 for joint filers.

If everything were to more or less remain equal to the data released from the IRS in 2013, roughly three-quarters of all taxpayers, if not more, would fall into the lowest tier (12%) under Trump's proposal.