Hillary Clinton's Income Tax Brackets: How Much Would You Owe?

By Markets Fool.com


Image source: Hillary Clinton.

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With a few key caucuses and primaries now in the rearview mirror, the field of presidential hopefuls that once stood at nearly two dozen has been whittled down to nearly a half-dozen. This election season, which is on the verge of kicking into high gear, serves as particularly important because we'll be electing a new president for the first time in eight years, and whoever Americans elect to the Oval Office could have a dramatic impact on your bottom-line.

Hillary Clinton lays out her tax plan
Our next president will have to tackle a number of important issues, ranging from keeping the U.S. economy on track to protecting our country's borders. However, one front-and-center issue that's really differentiated the candidates, and has moved to the center stage, is how they'll tackle tax reform.

Image source: Pixabay.

Recently, the current Democratic Party frontrunner Hillary Clinton unveiled her vision of tax reform that she believes will strengthen the American economy, as well as put the middle-class American family on more solid footing. Clinton's proposal, unlike her Democratic Party rival Bernie Sanders, and Republican frontrunners Donald Trump and Ted Cruz, is perhaps the closest plan we have to the current status quo.

In fact, as you'll see below when we get into more detail, Clinton's plan would increase ordinary income tax rates on only a very small swath of wealthy Americans. Instead, her tax plan does most of its work from the investment and deduction side of the equation.

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How much would you owe?
In terms of income-tax brackets the biggest change under Clinton's tax proposal would be the creation of an eighth ordinary income-tax bracket for individuals, married filers, and heads of households earning more than $5 million annually.

To get a better visualization, let's have a look at the current tax brackets as of 2016 per the IRS:

Ordinary Income Capital Gains and Dividends Single Filers Married Filers Heads of Household
10% 0% $0-$9,275 $0-$18,550 $0-$13,250
15% 0% $9,275-$37,650 $18,550-$75,300 $13,250-$50,400
25% 15% $37,650-$91,150 $75,300-$151,900 $50,400-$130,150
28% 15% $91,150-$190,150 $151,900-$231,450 $130,150-$210,800
33% 15% $190,150-$413,350 $231,450-$413,350 $210,800-$413,350
35% 15% $413,350-$415,050 $413,350-$466,950 $413,350-$441,000
39.6% 20% $415,050+ $466,950+ $441,000+

Table by author. 2016 income tax schedule via IRS.

Now, here's what these income tax brackets would look like if Clinton were to become president and implement her tax plan in full:

Ordinary Income Capital Gains and Dividends Single Filers Married Filers Heads of Household
10% 0% $0-$9,275 $0-$18,550 $0-$13,250
15% 0% $9,275-$37,650 $18,550-$75,300 $13,250-$50,400
25% 15% $37,650-$91,150 $75,300-$151,900 $50,400-$130,150
28% 15% $91,150-$190,150 $151,900-$231,450 $130,150-$210,800
33% 15% $190,150-$413,350 $231,450-$413,350 $210,800-$413,350
35% 15% $413,350-$415,050 $413,350-$466,950 $413,350-$441,000
39.6% 20% $415,050-$5,000,000 $466,950-$5,000,000 $441,000-$5,000,000
43.6% 24% $5,000,000+ $5,000,000+ $5,000,000+

Table by author. Data source, IRS 2016 tax schedule and Tax Foundation.

Clinton's plan involves a 4% surtax on income earned in excess of $5 million. This tax would wind up affecting roughly one in every 5,000 taxpayers; over a decade, it's projected to raise an additional $150 billion in tax revenue for the federal government according to the Clinton campaign. Ordinary income rates for individuals, married filers, and heads of household earning less than $5 million would remain unchanged.

Where Clinton tends to get aggressive with her tax reform is in dealing with investments and deductions.

In terms of deductions, Clinton would cap the value of all itemized deductions at 28%, which would mean that wealthier individuals wouldn't get the benefit of deductions that currently can equate to $0.396 for every dollar. Additionally, Clinton would enact the so-called "Buffett Rule," which establishes a 30% minimum tax on taxpayers with an adjusted gross income (AGI) in excess of $1 million. This tax would be phased in between $1 million and $2 million in AGI.

Also of interest is Clinton's proposal to adjust the capital gains tax schedule for the top income earners. As it stands now, the capital gains structure for the top ordinary tax bracket is very cut and dried.

Assets, such as stocks, held for a year or less, are taxed at a short-term ordinary income-tax rate (39.6%). Conversely, assets held for a year and a day, or longer, are taxed at a peak rate of 20% for top income earners. The Affordable Care Act also institutes a net investment income surtax of 3.8% on individuals with AGI's above $200,000, and married filers with AGI's north of $250,000.

If Clinton gets her way, medium-term holdings would be taxed at a substantially higher tax rate, as you can see below:

Years Held Marginal Tax Rate Net Investment Income Tax Surtax on Incomes > $5 million Combined Capital Gains Tax Rate
< 1 year 39.6% 3.8% 4% 47.4%
1-2 years 39.6% 3.8% 4% 47.4%
2-3 years 36% 3.8% 4% 43.8%
3-4 years 32% 3.8% 4% 39.8%
4-5 years 28% 3.8% 4% 35.8%
5-6 years 24% 3.8% 4% 31.8%
> 6 years 20% 3.8% 4% 27.8%

Table by author. Data source: Tax Foundation.

Assets held for two years or less would be taxed at today's peak ordinary income-tax rate, with a regressive rate between years three and six. Once an asset is held for at least six years, the holder would be entitled to receive the current long-term capital gains tax of 20%. Inclusive of the 4% surtax for individuals and couples earning more than $5 million annually, and the net investment income tax, capital gains taxes on assets held less than two years would equal a whopping 47.4%!

Additional proposals include a tax on high-frequency trading, a restoration of the estate tax to the 45% rate, with a concurrent lowering of the exemption level to $3.5 million, tax credits for employers that offer profit-sharing plans, and a limit on the total value of tax-deferred and tax-free retirement accounts.

Potential impact of Clinton's tax plan
How might Clinton's tax reforms impact the U.S. economy and you? That's very much up to debate -- and all answers to this question are nothing more than guesses at this point -- but for our answer, we'll turn to an analysis conducted by the Tax Foundation.

Image source: Flickr user Helga Weber.

According to the Tax Foundation's dynamic models that factor in the believed effect of Clinton's tax reforms, there would be a slightly adverse economic impact during the next decade. Tax Foundation suggests that U.S. GDP would fall by 1%, wages would dip by 0.8%, about 311,000 full-time equivalent jobs would be lost, and businesses would cut their investments by almost 3%.

Further, the Tax Foundation sees Clinton's reforms on taxes, deductions, and investments boosting tax revenue on a static basis -- i.e., meaning without factoring in its dynamic growth model -- by about a half-trillion dollars. With the aforementioned adverse impact on GDP factored in, Tax Foundation anticipates a net revenue gain of $381 billion.

Benefits and concerns
Now that you have a better idea of what Clinton's tax reforms entail, let's take a look at how her plan would potentially help or hurt America.

One of the clearest advantages of Clinton's tax plan is that her surtax would affect a very small snippet of the population that could, in all likelihood, be able to support a higher tax rate. By specifically targeting her tax efforts at the richest of the rich, Clinton ensures that low-, middle-, and even upper-middle class individuals and families aren't going to see their ordinary income tax rates increase. Understanding that Clinton's tax plan affects a small handful of taxpayers is liable to draw strong support from the working class.

Secondly, while Clinton's proposal would tax investments at a potentially higher rate for top income earners, it may also create an incentive among the wealthy to buy and hold their investments over the long term. At The Motley Fool, we often preach the advantages of holding stocks over the long term, because studies have shown, time and again, that trying to time the market simply isn't possible. Long-term investing allows you to use time and compounding to your advantage, regardless of what income decile you find yourself in. Thus, Clinton's plan could infuse a smart investing mindset for all Americans.

Finally, Clinton's plan is, in many aspects, very similar to what we're used to now. Even with some changes for upper-income earners, the impact of Clinton's tax reforms would likely lead to a smooth transition.


Image source: Flickr user Okko Pyykko.

Of course, Clinton's plan has a number of disadvantages, too.

For starters, if the Tax Foundation's growth model is even roughly in the ballpark, then Clinton's proposal is only set to improve taxable revenue by $381 billion during the next decade. The amount of national debt, and interest paid on that debt, would more than likely continue to climb. Again, it's tough to predict what federal budgets might look like 10 years from now, but it seems unlikely that Clinton's tax reforms would make any meaningful dents in our growing national debt, or annual federal budget deficits..

Secondly, whereas Clinton's investment tax changes do encourage longer investment holding periods (which is often a good thing), it may also result in Clinton's campaign overstating how much revenue they'll eventually receive from these changes. If wealthy investors are incented with a lower tax rate for holding their assets over an extended period of time, that's likely what they'll do. This would mean potentially lower tax revenue collected from this aspect of Clinton's tax reforms.

Lastly, and to harp further on the previous point, raising taxes on short-term capital gains -- assets held for two years or less in Clinton's proposal -- could discourage investments altogether. It's possible that some wealthier individuals simply don't want to hold their assets for six or more years, which could lead to some degree of economic stagnation, as well as a loss of wealth creation. It would also lead to lost revenue, because fewer investments would be made by the wealthy.

Just as we saw with the Tax Foundation's analysis, the benefits and concerns with Clinton's tax plan that I've laid out above are presumed to be nothing more than assumptive at the moment.

How would you fare under Clinton's tax plan? Share your comments below.

The article Hillary Clinton's Income Tax Brackets: How Much Would You Owe? originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.