Are you curious how much you could save if income taxes were eliminated? Let’s break down the numbers for a family earning $75K a year.
The idea of elimination of income taxes has been floated by President Donald Trump, and it could potentially change the financial landscape for middle-class households significantly. For a married couple earning $75,000 annually, the elimination could translate to annual savings of approximately $5,032 from individual income taxes alone. Additionally, if FICA tax elimination were included, they could save another $5,738, bringing the total annual savings to a remarkable $10,770. But what does this really mean for your finances?
The Breakdown of Potential Savings
Let’s explore how this figure is reached. For a married couple filing jointly in the 2024 tax year, after taking the standard deduction of $29,200, they’re left with a taxable income of $45,800. The income tax is structured progressively
- The first $23,200 is taxed at 10%: $2,320
- The next $22,600 is taxed at 12%: $2,712
- Total federal income tax savings would then be $5,032.
For a single taxpayer in the same income bracket, they might see even greater benefits. By only claiming the standard deduction once, their taxable income becomes $60,400. They would pay
- $1,160 (10% on first $11,600)
- $4,266 (12% on next $35,550)
- $2,915 (22% on next $13,250)
- Total income tax burden would equate to $8,341, demonstrating a higher saving potential for individuals.
Saving on FICA Taxes
Eliminating FICA taxes, which fund Social Security and Medicare, can provide further monetary relief. Both employees and employers currently contribute 7.65%, leading to a combined total of 15.3%. If the elimination of these taxes were implemented, a household could save an additional $5,738 per year, making a significant impact on disposable income. This savings applies uniformly to both single and married filers, as those taxes are not influenced by deductions or earnings margins.
Economic and Policy Implications
While the idea of savings from tax cuts is appealing, the broader implications warrant careful examination. The U.S. Treasury’s collection of $2.43 trillion from individual income taxes in fiscal year 2024 illustrates the sheer volume of revenue that could be lost. This amount represents nearly half of all federal revenue, thus indicating that eliminating these taxes may not be as straightforward as it seems.
If income taxes are abolished, the government would still need to generate substantial revenue to operate effectively. The Trump administration’s potential approaches may involve alternative strategies. Possible measures could include implementing a consumption tax, such as a national sales tax, to recover some of the lost income from taxes.
Potential Risks for Low-Income Earners
Some demographic groups, particularly low-income families, could face hardships without income taxes. These sectors often receive refundable tax credits greater than what they pay in taxes, meaning income taxes effectively serve as a form of wealth redistribution. The elimination may leave these families vulnerable due to the loss of this financial safety net. Experts convey concerns that families earning less than $75,000 might struggle even more if they depend on refund systems that provide essential assistance during tough times.
Jillian Hishaw, an attorney observing increased bankruptcy filings among low-income families, indicates that without the refunds typically provided by income taxes, many could resort to severe financial outcomes. As she explains, Chapter 7 bankruptcy filings often leave families with no meaningful assets to reclaim, intensifying their financial crises.
Lost Incentives and Behavioral Impact
Without income taxes, the government would lose a significant incentive mechanism. Tax breaks currently motivate behaviors that contribute to economic stability and personal savings, including retirement contributions and home ownership. Eliminating those taxes might reduce the inclination for taxpayers to set aside money for retirement, which is vital for their future financial security.
The Bottom Line
While the elimination of income taxes and FICA taxes presents an enticing prospect for annual savings of up to $10,770, the implications for government revenue, support systems for low-income families, and behavioral incentives can’t be overlooked. Those considering tax changes must weigh both advantages and potential pitfalls carefully.
The complexity of tax policy means that while individuals may dream of simplified tax systems and increased take-home pay, the intricacies involved in maintaining government spending and support programs mean that a dramatic overhaul could be more challenging than it sounds. Rather than rushing to eliminate income taxes entirely, exploring options that balance savings for individual taxpayers with necessary government revenue may serve the public best in the long run.