Taxes
are on sale, although few people would describe them that way. Measured against
the last eighty years, the federal income tax rates most Americans pay are
close to the lowest on record. Most households would nonetheless swear they are
paying more than ever, and they are not imagining it. Both statements are true.
The income tax went on sale while several other costs rose quietly, and those
other costs are the ones people notice.
The federal income tax began in
1913 with a bottom rate of 1 percent and a top rate of 7 percent. Two world
wars changed both numbers quickly. By 1944 the top rate was 94 percent on
income above $200,000, and the bottom rate was 23 percent. At 94 percent,
Washington was less a partner in a taxpayer’s success than its majority
shareholder. Top rates stayed above 90 percent through 1963, and the lowest
bracket sat at 20 percent for most of the 1950s. Many of today’s retirees were
alive in 1963, although few were old enough to file a return, much less to
study the rate schedule.
Statutory rates overstate what
anyone actually paid. Deductions, exclusions, and income splitting kept the top
1 percent of earners in the 1950s at an average of about 17 percent of income
in income taxes and 42 percent in all federal, state, and local taxes combined,
according to the Tax Foundation. The better gauge for most readers is the
typical family. The Tax Policy Center calculates that a median-income family of
four paid 5.6 percent of its income in federal income tax in 1955, 8.7 percent
in 1963, and a peak of 11.4 percent in 1980. By the mid-2010s the figure had
fallen to about 5 percent, and the 2017 law then nearly doubled the standard
deduction and doubled the child tax credit. The typical family’s income tax
bill, measured as a share of income, is now about as low as it has been at any
point since the 1950s.
The 2026 price tag looks very
different. The lowest bracket is 10 percent. The top rate is 37 percent, and a
married couple does not reach it until taxable income passes $768,700. After a
$32,200 standard deduction, a couple filing jointly pays no more than 12
percent on taxable income up to $100,800. For a household with a typical
income, most earnings are taxed at 10 or 12 percent or not taxed at all.
Average rates tell the same
story. The Congressional Budget Office (CBO) tracks the share of income
households actually pay in federal taxes, and it found that average federal tax
rates fell for every income group between 1979 and 2019, with the steepest
decline at the bottom. In 2019, households in the middle fifth of the income
distribution paid about 13 percent of their income in all federal taxes
combined. The 2017 tax law lowered rates further, and the 2025 law made those
lower brackets permanent.
In Washington,
“permanent” means “until further notice.”
The income tax gets the
headlines every April. The payroll tax collects every other Friday.
When Social Security taxes
were first collected in 1937, the rate was 1 percent from the worker and 1
percent from the employer, applied to the first $3,000 of wages. By 1963, the
year of the 91 percent top bracket, the Social Security rate was 3.625 percent
each on the first $4,800 of wages. Medicare’s hospital insurance tax arrived in
1966 at 0.35 percent each. Today the Social Security rate is 6.2 percent each
on wages up to $184,500, and the Medicare rate is 1.45 percent each on all
wages, with no cap. The combined 15.3 percent rate has held since 1990, and it
is the highest in the program’s history. Self-employed workers pay both halves.
Wages above $200,000 for a single filer, or $250,000 for a couple, are subject
to an additional 0.9 percent Medicare tax, and investment income above the same
thresholds can be subject to a 3.8 percent net investment income tax.
For most working
households, the payroll tax is the larger bill. The Tax Policy Center estimated
in 2016 that almost two-thirds of households paid more in payroll tax than in
income tax, counting the employer’s share, which economists generally treat as compensation
that would otherwise have been paid as wages. A worker in the 12 percent
bracket has 7.65 percent of every paycheck withheld for Social Security and
Medicare before any income tax is calculated, and the employer remits another
7.65 percent.
Social Security and
Medicare taxes, in short, are not part of the sale. Anyone who hears that taxes
are at historic lows and then looks at a pay stub has good reason to be
skeptical. The legislation now before Congress also points in the other
direction.
The 2026 Trustees Reports
project that the Social Security retirement trust fund will exhaust its
reserves in 2032 and that Medicare’s hospital insurance fund will do the same
in 2033. From those dates forward, incoming taxes would cover only part of scheduled
benefits. Congress can close the gap with less spending, more revenue, or a
combination of the two, and most of the current proposals rely heavily on
revenue. The Social Security 2100 Act would remove the wage cap for earnings
after 2026 and apply the 12.4 percent Social Security rate to net investment
income for taxpayers with income above $400,000. The Strengthening Social
Security Act would phase out the cap between 2028 and 2032, after which every
dollar of wages would be taxed. The Medicare and Social Security Fair Share Act
would apply the Social Security tax to income above $400,000 and raise the
Medicare rate on that income by 1.2 percentage points. In June 2026, Sens.
Bernie Moreno (R-Ohio) and Elizabeth Warren (D-Mass.) proposed raising the cap,
which suggests that some Republicans now expect new revenue to be part of any
solution.
None of these bills has
passed, and most of them target higher earners for now. The direction, however,
is clear. As 2032 approaches, the payroll tax is far more likely to rise than
to fall.
Consumer prices have risen roughly 29
percent since 2020, according to the Bureau of Labor Statistics consumer price
index, and inflation accelerated again in 2026 as energy prices climbed. A
lower tax rate on a paycheck that buys less does not register as relief.
Retailers understand this well: a 30 percent discount means very little when
the price tag was raised the week before.
The brackets are adjusted for
inflation every year, but since the 2017 law the adjustment has used the
chained consumer price index, which usually rises more slowly than the standard
index that most raises and cost-of-living adjustments follow. The Joint
Committee on Taxation estimated that the switch would raise about $134 billion
over ten years. The annual difference is only a few tenths of a percentage
point, but it compounds.
The larger problem is the thresholds
that are not adjusted at all. Social Security benefits begin to be taxed once
“provisional income” exceeds $25,000 for a single filer or $32,000
for a couple. Those figures took effect in 1984, the year Ghostbusters opened,
and they have not changed since. The franchise has produced three sequels and a
reboot since then; the thresholds have not moved once. When the tax began,
fewer than one beneficiary in ten paid it. The Congressional Research Service
notes that the share grows every year because the thresholds stay fixed while
incomes and benefits rise. The 0.9 percent Medicare surtax and the 3.8 percent
investment income tax work the same way, since their $200,000 and $250,000
thresholds have been frozen since 2013. Congress never voted for these
increases. Inflation enacted them on its own.
The sale has another catch: a large share of
households pay almost nothing at the income tax register. The Tax Policy Center
estimates that about 40 percent of households owed no federal income tax in
2025. Most of them are not avoiding anything. Roughly 70 percent earn less than
$75,000, many are retirees living mainly on Social Security, and many working
families see their liability erased by the standard deduction and by refundable
credits such as the Earned Income Tax Credit and the Child Tax Credit. Most of
the working households in this group still pay Social Security and Medicare
taxes, often more than they receive back in refundable credits.
The income tax itself, however, rests on a
narrow base. IRS data for tax year 2023, compiled by the Tax Foundation, show
that the top half of filers paid 96.7 percent of all federal income taxes and
the bottom half paid 3.3 percent. The top 1 percent earned about 21 percent of
the income and paid about 38 percent of the tax, at an average rate of 26.3
percent, compared with 3.7 percent for the bottom half. Each deduction or
credit that takes another household off the rolls leaves the remaining payers
to cover the difference, either through rates today or through borrowing that
must be repaid later. A sale offered to fewer and fewer customers rarely feels
like a bargain to the ones still paying full price.
State income taxes have mostly been
falling. At least eight states lowered their income tax rates on January 1,
2026, according to the Tax Foundation, and several are moving toward a flat
rate or no income tax at all. Property taxes moved in the opposite direction.
ATTOM, a real estate data firm, found that the average property tax bill on a
single-family home rose 3 percent in 2025 to $4,427, even though average home
values declined slightly. The effective property tax rate reached its highest
level since 2020. Once sales taxes and local fees are added, many households
pay more to their local governments even as their income tax rates fall.
Retirees feel this cost directly. The
standard Medicare Part B premium rose 9.7 percent to $202.90 a month in 2026,
and it is deducted from the Social Security check before the retiree sees it.
Higher-income retirees also pay an income-related surcharge known as IRMAA. The
government calls the charge a premium. When it grows faster than the
cost-of-living adjustment, as The Senior Citizens League reports it has for
three consecutive years, the household budget is unlikely to see much
distinction.
Americans held $51.2 trillion in retirement
assets at the end of June 2026, according to the Investment Company Institute,
including $19.9 trillion in IRAs and $15.0 trillion in 401(k)-type plans. Much
of that money sits in traditional, pre-tax accounts and has never been taxed.
The tax on it was deferred, not forgiven. Required minimum distributions will
eventually force it out, stack it on top of Social Security, and pull more of
each benefit into taxable income along the way. Many retirees find that their
tax rate in retirement is not much lower than it was during their working
years, and some find that it is higher. A sale is difficult to enjoy when the
bill is already in the mail.
Several of today’s discounts also carry
expiration dates. The 2025 law’s additional $6,000 deduction for taxpayers 65
and older runs only through 2028, and the higher cap on the state and local tax
deduction reverts to $10,000 in 2030.
This reason is the hardest to dismiss. In
fiscal year 2026, the federal government collected about $5.4 trillion and
spent about $7.4 trillion, leaving a deficit of $2.0 trillion, according to
CBO. Total federal debt passed $40 trillion in August 2026. Net interest on the
debt exceeded $1 trillion for the year, more than the government spent on
defense or Medicaid, and CBO projects that it will reach about $2.1 trillion a
year by 2036.
Neither party has shown much appetite for the
spending side of the ledger. CBO estimates that the 2025 tax law will add about
$3.4 trillion to deficits over ten years, and several of the Social Security
bills described above would raise benefits as well as taxes. When the cart is
this full, someone eventually pays at the register, and households with large
balances in tax-deferred accounts are an obvious place for lawmakers to look.
The political landscape is shifting as well.
Democratic socialists have begun winning races that would have been long shots
a decade ago. Zohran Mamdani, a member of the Democratic Socialists of America
(DSA), was elected mayor of New York City in November 2025 on a platform that
included fare-free buses, universal child care, and city-run grocery stores,
financed largely through higher taxes on millionaires and corporations. A
Brookings Institution review counted 282 DSA-endorsed candidates in the 2026
primaries. Most sought local or state offices, and fewer than half of those
running for Congress or statewide office won their primaries, so the movement’s
reach remains limited. Its victories are real nonetheless, including a 2026
primary defeat of a sitting congressman in New York’s 13th District. Whether
the movement can translate those gains into a lasting bloc in Congress remains
an open question, and the answer will shape the spending debate for years.
If tax rates are more likely
to rise than fall over the next two decades, the practical question is how to
buy at today’s prices.
A Roth conversion moves
money from a traditional IRA into a Roth IRA and pays the tax now, at today’s
rates, rather than later at whatever rate Congress eventually sets. The least
expensive years for a conversion are often the ones between retirement and the
start of Social Security and required distributions, when income is low and the
10 and 12 percent brackets sit largely unused. Filling those brackets
deliberately is one of the simplest ways to pay the sale price.
Tax diversification spreads
savings across taxable, tax-deferred, and tax-free accounts so that no single
future tax rate controls an entire retirement. Most people reach retirement
with nearly everything in the tax-deferred category and almost nothing in the
tax-free one.
Coordination is where most
of the money is made or lost. A conversion that looks sensible in isolation can
raise a Medicare premium two years later or make more of a Social Security
benefit taxable. A multiyear projection that considers the brackets, the IRMAA
tiers, and Social Security together is the best way to distinguish a genuine
bargain from an expensive impulse purchase, and a retirement income advisor can
prepare one.
Taxes are on sale. It just
does not feel like it. No one rings a bell when a sale ends; the prices simply
change.
Jeff Batson, MBA, RFC®, is a retirement
income advisor with Goat Planning in Staunton, Virginia, serving clients in 20
states. A Navy veteran, he is the author of Don’t Run Out: A Practical Guide
to Social Security, Medicare, and Tax-Smart Retirement Income. Learn more
at goatplanning.com.
This article is for educational purposes
only and is not legal, tax, or financial advice. It draws on sources believed
to be reliable, and any opinions are not predictive of future events. Please
consult a qualified professional about your own situation. This content has not
been reviewed by FINRA.