This tax calculator is designed to show the difference between the tax bill you would face under current tax policies, and under the tax policies proposed by Barack Obama and Senator McCain. The calculator starts by using the tax rates and credits that are currently on the books, and then calculates the difference under each candidate's proposals.
How Does the Tax Calculator Work?
This calculator begins by estimating your net tax burden under current law by applying the current schedule of individual income tax provisions to the personal information entered into the model. After the current law estimate is derived, the model calculates the net change in your tax burden under the plans put forth by Barack Obama and Senator McCain. These changes under Obama and McCain are the figures reported in the output screen.
To derive its current law estimate, the model reduces your "annual income" entry to an estimate of taxable income by applying the current schedule of personal exemptions and standard deductions, which vary based on your filing status, income, and number of dependents. (The model imputes an estimated amount of above-the-line deductions and capital income not treated as ordinary income, based on IRS statistics on these items by income range in 2005). Next, the model applies the current schedule of marginal tax rates to calculate your estimated taxes, before the application of tax credits. The model then applies any available income tax credits to reduce your taxes as you would do in filling out a 1040-specifically, the earned income tax credit, the child and dependent care tax credit, and the child tax credit are all included.
Finally, to derive the changes under the McCain and Obama plans, the model is re-run through the same steps, but using the proposed rates/credits/deductions under the respective plans. More detail on these changes is below.
Why isn't this like TurboTax or other online calculators where I can enter my exact information, including exact income, exact amount of deductions etc.?
Any tax calculator must balance the goals of simplicity and precision. The goal of this calculator is to make it easy for you to get an accurate sense of what would happen to your taxes under Obama and McCain. The calculator is not doing your taxes for you - that would require more information and time. Your actual tax bill will depend on your specific circumstances next year and years going forward. But this tool should give you a good sense of how your tax bill would change if Barack Obama or John McCain is elected president.
Why are the results different from those reported by the Tax Policy Center, or what I saw on other sites like obamataxcut.com?
The Tax Policy Center (TPC) took a different approach to analyzing the candidates' tax plans. Their analysis is not a 'calculator' of how your own tax bill would change next year, given your personal characteristics (as our tax calculator is). Theirs is rather a calculation of how groups of people in broad income categories would fare under the candidates' policies. TPC includes the effects of other features of the tax code, such as corporate tax cuts, that we left out since the tax calculator calculates only how individuals' income taxes change (see below).
We also calculate the change in your taxes assuming that you have the income that you input—an obvious choice in our context—whereas their calculation takes existing data on individual behavior and assumes that the individuals in this data change their behavior in response to tax cuts. While not all of TPC's assumptions accurately reflect the impact of Obama's plan, both approaches are legitimate and important. They're simply separate exercises. The difference between TPC's "average tax change" figures and the individual outputs here can be explained by these differences. This also explains the differences between this calculator and obamataxcut.com, which is based on TPC's representative taxpayer tables.
Specifically which of the Candidates' Tax Proposals are included in this tax calculator?
Barack Obama and John McCain have each put forward a range of tax proposals during the course of the campaign. This calculator focuses on tax proposals that would directly change the taxes that individuals would pay.
Senator McCain's only tax proposal that would change individual taxpayers liabilities (relative to current policy) is an increase in the so-called "dependent exemption" which is claimed by parents and other taxpayers on their tax forms. McCain has proposed to increase the exemption by $500 annually, which would have the effect of increasing the dependent exemption from $3,500 a year in 2008 to $4,000 a year if implemented in 2009. For families making under $50,000, McCain would increase the dependent exemption to $7,000 per dependent immediately in 2009, and he would phase-out that expansion for married families making over $50,000 by $100 dollar increments. For more detail on McCain's tax proposals click here.
The model includes the following direct tax proposals from Senator Obama: (1) A $500 per worker and $1000 per working couple "Making Work Pay" refundable tax credit, structured as an offset against workers' payroll tax liabilities. The credit is available to all couples making less than $150,000 and is phased out after that; (2) A Universal Mortgage Interest Tax Credit- for tax filers who do not itemize, Obama would offer a tax credit equal to 10% of mortgage interest tax payments paid each year; (3) Expansions to the Earned Income Tax Credit - Obama would expand the EITC benefits available to families with three or more children and he would increase EITC benefits for low income singles; (4) An expansion to the Child and Dependent Care tax creditÑ Obama would make the CDCT refundable and he would allow families to receive up to a 50% credit on the first $6,000 on child care expenses (rather than the current law 35% credit); (5) Elimination of Income Taxes for Seniors Making less than $50,000. For more detail on Obama's tax proposals click here.
NOTE: This tax calculator is a conservative estimate of the tax cut you would receive under Obama's tax policies for several reasons.
Obama's College Tax Cut: The tax cut figures reported in the calculator do not include Obama's American Opportunity Tax Credit, which provides up to a $4,000 refundable tax credit for college expenses for families making up to $119,000.
Obama's Retirement Savings Tax Cut: The tax cut figures reported in the calculator do not include expansion of the Saver's Credit, which provides a refundable 50% match on the first $1,000 of retirement savings done by families making less than $75,000 per year.
Obama's Child Care Tax Cut: For people with dependent care expenses, the model imputes their benefit under Obama's plan by assuming standard credit amounts for filers by income category, according to IRS statistics in 2005. If you have above average expenses, you will receive a more generous tax cut than is reported by the calculator.
Obama's Zero Capital Gains Rate for Investments in Small Businesses: The calculator does not include the tax benefits you will get under the Obama plan on any gains you realize from investments in small businesses. Obama would eliminate capital gains taxes on these gains.
How Are the Bush Tax Cuts Treated in the Tax Calculator?
Barack Obama and Senator McCain both support extending the Bush tax cuts for all families making less than $250,000 (singles making under $200,000). Therefore, the model assumes that the Bush tax cuts are extended in 2009 for approximately 98% of taxpayers under both candidates' plans.
For the approximately 2% of earners above $250,000, John McCain supports extending the Bush tax cuts, while Barack Obama has proposed rolling back a portion of those tax cuts. This tax calculator assumes that those rollbacks are in effect under the Obama plan; accordingly, married couples making over $250,000 (singles making over $200,000) will pay the top two marginal rates that prevailed in the 1990s and will pay a 20% rate on capital gains and dividends.
The calculator assumes that under the McCain plan and under current law, all of the Bush tax cuts even for the wealthiest families remain in place.
How is the AMT treated in this Tax Calculator?
For simplicity's sake, the calculator assumes as a starting point that there would be a patch in the AMT under current law and under both candidates, meaning that no additional taxpayer will be affected by the AMT in that year. Senator McCain has consistently called for going beyond this position to permanently repeal the AMT, which would provide an additional $60 billion per year in tax cuts to the wealthiest few Americans.
Why does the calculator exclude McCain's corporate tax cuts?
This tax calculator is designed to show the direct impact of the candidates' proposals on your individual income tax liability. The calculator accordingly does not include either candidate's proposals for reforming corporate taxation.
Why doesn't the calculator include the impact of the candidates' health care plans?
The calculator focuses on the candidates tax plans, not their health care plans. Both candidates have proposed health plans that would substantially alter America's current health system. Both proposals would have a major impact on who is covered by health care, what type of coverage they receive, and the cost of that coverage as well. As a result, it is beyond the scope of this calculator to model those complex interactions.
However, excluding health plans from this calculator is again conservative in terms of presenting the net benefit that people would receive from Barack Obama versus John McCain. The Obama health plan would provide generous new tax credits on a sliding scale based on income to ensure that health insurance was affordable for middle income families. Obama would pay for these new tax credits by reforming the health system to bring down health care costs and with a portion of the revenue from rolling back the Bush tax cuts for families making more than $250,000 per year.
The McCain health care plan would provide a new $2,500 per individual/$5,000 per couple tax credit for health care. But to pay for this credit, the McCain plan would tax employees' health benefits for the first time in history. Because the cost of this new tax would grow with health costs while the value of McCain's new credit grows with inflation, the net cost to taxpayers grows substantially over time.
For more information on the McCain and Obama health plans, see here and here.
Why doesn’t the calculator show exact tax figures for higher income filers, such as families making more than $250,000?
If you are a married couple making over $250,000 or a single earner making more than $200,000, you are not likely to get a tax cut under the Obama tax plan. The calculator shows this on its result screen. Note that only about 2% of tax filers have incomes above $250,000 for married couples and $200,000 for singles.
However, under the Obama plan, all families - even the wealthiest - will pay lower tax rates than they would have paid in the 1990s. Some families making more than $250,000 would in fact pay lower taxes under the Obama plan than under the McCain plan because Obama has called for eliminating capital gains taxes on investments in small businesses. A family that realizes gains from an investment in a small business will pay a 0% capital gains rate under the Obama plan but would continue paying a 15% capital gains rate under the McCain plan. For more details, see here.
What if I am married filing separately?
Ninety-nine percent of people who file as "married filing separately" pay taxes as if they were singles. Only very high-income individuals who file as married filing separately pay as if they were not singles. If you generally file as "married filing separately" you can enter your filing status as "Single" and the tax calculator will give you an accurate picture of the difference in your tax liability under the two candidates' plans. Note that if you are married filing separately and also claim dependents on your tax returnÑsee below for definition of "dependents"Ñyou should enter "head of household" rather than "single."
What if I am married, but one spouse does not work? What filing status should I choose?
For simplicity's sake, the calculator assumes under the "married filing jointly" filing status that both spouses are working. If you are married but only one spouse has worked over the past year, you will be eligible for a $500 Making Work Pay Tax Credit under Obama, rather than a $1,000 credit. So you can either select "married filing jointly" and reduce your Obama tax cut by $500, or you can choose "head of household" to get an approximation of your tax savings.
What is a head of household?
Head of household is the correct filing status for someone who is not married, but who claims dependents on his or her tax returns. If you are unmarried and claim dependentsÑsee below for definition of "dependents" - you should enter "head of household." If you are unmarried but do not claim dependents, you should enter "single."
How are Capital Gains and Dividends Income Treated in the Model?
Both Barack Obama and John McCain have proposed to keep the current schedule of capital gains and dividends tax rates in place for all married couples making less than $250,000 and for singles making less than $200,000. The calculator assumes that there will be no change in capital gains and dividend taxation relative to current law under either Obama or McCain for those taxpayers (e.g. 2008 capital gains/dividend rates of 15% for most tax payers would remain in place in 2009). Because there is no change, the calculator treats capital gains and dividends income as "gross" income rather than as a separate entry. After a user inputs his or her income and filing status, this calculator also imputes an estimated amount of capital gains and qualified dividends to reduce that person's taxable income, with these imputations being based on IRS statistics in 2005.
How are Social Security taxes addressed in the calculator?
This tax calculator assumes the continuation of current law for Social Security taxes. Barack Obama has said that he would like to work with members of Congress from both parties to strengthen Social Security and prevent privatization while protecting middle class families from tax increases or benefit cuts. As part of a bipartisan plan that would be phased in over many years, he would ask those making over $250,000 to contribute a bit more to Social Security to keep it sound. Despite the smears of his opponents, Obama does not support uncapping the payroll tax at the full 12.4 percent rate. Instead, he is considering plans that would ask those making over $250,000 to pay in the range of 2 to 4 percentage points more in total (combined employer and employee). This change to Social Security would start a decade or more from now and is similar to the rate increases floated by McCain's close adviser Senator Lindsey Graham and that McCain has previously said he "could" support.
How does the model estimate the benefit of Obama's mortgage interest tax credit?
If you enter a mortgage balance, this model computes what your typical interest payments would be each year by using standard assumptions. Specifically, the model assumes that you have a 30-year mortgage with an interest rate of 6.25%. If you have a mortgage with a slightly higher interest rate than that which is assumed, your mortgage tax credit could be higher than that shown, which means that this would show a conservative estimate of your tax benefit under Obama's plan. Similarly, if you have a lower monthly payment on your mortgage, your tax cut under Obama would be slightly less than that shown.
What should I include in my "income" entry?
When the tax calculator asks you to enter your "income," it is asking for the total taxable income you receive from all sources each year. This income entry should include your wages, interest income, dividend income, capital gains, alimony, rental income, royalty income, farm income, unemployment compensation, taxable social security benefits, taxable pensions and annuities, taxable IRA distributions, and business income or losses. After you enter this value, and tax calculator will adjust it to deduce a "taxable income" estimate, based on the deductions or itemizations that you would receive given your other inputted information.
What is a "dependent"?
A dependent is someone who meets the rules for either a qualifying child or relative; should you choose, you may claim a qualifying child or relative on your tax return as a dependent to potentially receive preferential tax credits. The definitions of a qualifying child or relative come from the IRS. A qualifying child is someone who is under age 19 (or under age 24 and a full time student for at least 5 months a year, or any age and totally disabled), lives with you for more than half of the year, and does not provide more than half of his or her own support. The person can be your child, step child, adopted child, brother or sister, grandchild, niece, or nephew. A qualifying relative is someone who does not meet the qualifying child criteria but is still related to you in certain ways and is someone for whom you provide more than half of the support during the year. To read the exact criteria for a qualifying relative, go to IRS Publication 501.
Is this calculator rigged so that no family can lose under Obama?
This calculator is designed to reflect the reality of each candidate's tax plans. There are certainly some cases where the McCain plan offers a larger tax cut. But these cases are a small minority - because the overwhelming majority of families will do better under Barack Obama's tax plan.