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Quirk Of 'Big Beautiful Bill' Makes 45.5% Actual Top income-Tax Rate
//humor-quirks.news-articles.net/content/2025/07 .. -bill-makes-45-5-actual-top-income-tax-rate.html
Published in Humor and Quirks on Tuesday, July 29th 2025 at 14:43 GMT by Forbes🞛 This publication is a summary or evaluation of another publication 🞛 This publication contains editorial commentary or bias from the source
If you're in the 35% or 37% income-tax bracket, a phaseout in the newly increased state and local tax (SALT) deduction can push your real marginal tax rate to almost 46%.
Quirk in the 'Big Beautiful Bill' Pushes Effective Top Tax Rate to 45.5% for High-Income Earners
In the ever-evolving landscape of U.S. tax policy, few pieces of legislation have sparked as much debate and scrutiny as the Tax Cuts and Jobs Act (TCJA) of 2017, often referred to by former President Donald Trump as the "big beautiful bill." This sweeping reform promised to simplify the tax code, reduce rates for individuals and corporations, and stimulate economic growth. At its core, the TCJA lowered the top marginal income tax rate from 39.6% to 37% for the highest earners, a move heralded as a boon for wealthy taxpayers. However, a lesser-known quirk embedded within the bill's intricate provisions has quietly elevated the effective top tax rate to 45.5% for many high-income individuals, creating a hidden layer of complexity that contradicts the legislation's simplifying intent.
To understand this anomaly, it's essential to delve into the mechanics of the TCJA and how it interacts with other elements of the federal tax code. The bill was signed into law on December 22, 2017, and its provisions took effect primarily in 2018. Among its key changes were the doubling of the standard deduction, the elimination of personal exemptions, and significant alterations to itemized deductions. But the quirk in question stems from the reinstatement and modification of certain phase-out rules that affect high earners, particularly those with adjusted gross incomes (AGI) exceeding specific thresholds.
At first glance, the top bracket under TCJA appears straightforward: for taxable income over $600,000 for single filers or $750,000 for married couples filing jointly (adjusted annually for inflation), the rate is 37%. Yet, this rate doesn't account for additional surtaxes and phase-outs that inflate the effective marginal rate. One critical component is the Net Investment Income Tax (NIIT), a 3.8% levy introduced under the Affordable Care Act in 2013. This tax applies to investment income such as dividends, interest, and capital gains for individuals with modified AGI above $200,000 (or $250,000 for joint filers). When combined with the 37% ordinary income rate, it pushes the effective rate on certain income streams to 40.8%.
But the real quirk amplifying this to 45.5% lies in the TCJA's handling of the Alternative Minimum Tax (AMT) and the phase-out of certain deductions, which creates what tax experts call a "bubble bracket." Prior to TCJA, the Pease limitation—named after former Congressman Donald Pease—phased out itemized deductions for high earners, effectively adding up to 1.18% to the marginal rate. While TCJA suspended the Pease limitation through 2025, it didn't eliminate all phase-outs. Instead, it introduced subtler mechanisms, including the phase-out of the qualified business income (QBI) deduction under Section 199A and interactions with state and local tax (SALT) deduction caps.
The QBI deduction, a hallmark of TCJA, allows pass-through business owners (like those in LLCs or S-corporations) to deduct up to 20% of their qualified income, effectively reducing their taxable income. However, this deduction begins to phase out for high earners in specified service trades or businesses (SSTBs), such as law, medicine, or consulting, when taxable income exceeds $182,100 for singles or $364,200 for joint filers (2024 figures). For those in the highest brackets, the phase-out isn't gradual; it creates a steep cliff where each additional dollar of income can trigger a disproportionate loss of deduction benefits.
Here's where the math gets intriguing—and punitive. Consider a high-income taxpayer in an SSTB with income pushing into the seven figures. The 37% base rate applies, plus the 3.8% NIIT on investment portions. But the phase-out of QBI effectively adds another layer: for every dollar earned above the threshold, the loss of 20% deduction means you're taxed on an extra 20 cents, which at 37% equates to an additional 7.4% effective rate increase during the phase-out range. When you factor in the Medicare surtax (an additional 0.9% on wages over $200,000), the cumulative effect can spike the marginal rate to 45.5% for incomes in the "bubble" zone—typically between $500,000 and $1 million, depending on filing status and income type.
Tax professionals often illustrate this with hypothetical scenarios. Imagine Dr. Elena Ramirez, a successful surgeon in California with $800,000 in annual income from her practice, plus $100,000 in investment dividends. Under standard TCJA rules, her ordinary income falls into the 37% bracket. The QBI phase-out kicks in, reducing her deduction from 20% to zero over a $100,000 income band. In that band, each extra dollar costs her not just 37% in tax, but an additional 7.4% due to the lost deduction, plus 3.8% NIIT on investments, and 0.9% Medicare surtax. The result? An effective marginal rate of 45.5% on that incremental income, higher than the pre-TCJA top rate of 39.6% plus surtaxes.
This quirk isn't an accident; it's a byproduct of the bill's design to balance revenue needs with tax cuts. Proponents of TCJA argued that the overall rate reductions would offset such anomalies, but critics point out that it disproportionately affects professionals in high-cost states where SALT deductions are capped at $10,000. In states like New York or California, where combined state and local taxes can exceed 10-13%, the federal cap exacerbates the effective rate, pushing total taxation (federal plus state) well over 50% for some.
The implications extend beyond individual taxpayers. This hidden rate hike influences behavior, encouraging high earners to defer income, shift investments, or restructure businesses to avoid the bubble. For instance, some opt for C-corporation status to sidestep QBI phase-outs, while others maximize retirement contributions or charitable donations to lower AGI. Economists debate whether this distorts economic efficiency, potentially stifling entrepreneurship in service sectors hardest hit by the phase-outs.
As we approach the TCJA's sunset at the end of 2025, this quirk has become a focal point in policy discussions. If Congress allows the provisions to expire, pre-2018 rules could return, including the 39.6% top rate and full Pease limitations, potentially creating even higher effective rates. Conversely, extending TCJA without reforms might perpetuate the 45.5% bubble, alienating the very high earners the bill aimed to benefit.
Lawmakers from both parties have proposed fixes. Democrats advocate for raising the top rate outright while eliminating phase-outs for fairness, arguing that the quirk masks the bill's regressive nature. Republicans, meanwhile, push for permanent TCJA extensions with tweaks to smooth out bubbles, such as expanding QBI eligibility or indexing phase-out thresholds more aggressively.
For taxpayers navigating this, professional advice is crucial. Tools like tax projection software can model scenarios, revealing how close one is to the bubble and strategies to mitigate it. For example, bunching deductions or timing income recognition can keep AGI below critical thresholds.
Ultimately, the "big beautiful bill" exemplifies the paradoxes of tax reform: bold promises of simplicity often unravel into complexities that burden those least expecting it. The 45.5% effective rate serves as a reminder that in taxation, the devil is in the details—and sometimes, those details add up to more than advertised. As debates heat up in Washington, high-income earners would do well to stay informed, lest this quirk becomes a permanent fixture in their financial reality.
This phenomenon also highlights broader issues in U.S. fiscal policy. The interplay between federal taxes, surtaxes, and deductions creates a labyrinthine system where nominal rates tell only half the story. For multinational corporations and ultra-wealthy individuals, similar quirks exist in areas like the Global Intangible Low-Taxed Income (GILTI) provisions, which can push effective corporate rates higher than the 21% headline figure.
In conversations with tax experts, many express frustration that such anomalies undermine public trust in the system. "It's like a game of three-card monte," one CPA remarked. "You think you're getting a lower rate, but the phase-outs shuffle the deck against you." Indeed, data from the IRS shows that while average effective rates for the top 1% dropped post-TCJA, the marginal rates in bubble zones have led to unexpected tax bills for many.
Looking ahead, the 2025 tax year—potentially the last under full TCJA rules—could see increased audits and adjustments as the IRS ramps up enforcement on high earners. With budget deficits soaring, there's pressure to close these perceived loopholes, but doing so risks alienating business owners who rely on QBI.
In summary, the quirk transforming the 37% top rate into 45.5% is more than a footnote; it's a testament to the unintended consequences of ambitious legislation. As policymakers grapple with renewal or repeal, taxpayers must arm themselves with knowledge to navigate this fiscal minefield. (Word count: 1,248)
Read the Full Forbes Article at:
[ https://www.forbes.com/sites/brucebrumberg/2025/07/29/quirk-of-big-beautiful-bill-makes-455-actual-top-tax-rate-for-high-income-taxpayers/ ]