The bill inserts a new statutory limit on income tax liability for taxpayers below a cost-of-living threshold and establishes a separate surcharge on very high individual incomes. It ties the low/middle-income protection to a cost-of-living exemption derived from an “annualized cost‑of‑living wage” and creates graduated surcharge rates that apply above multimillion-dollar thresholds.
This is a two-part reallocation: it reduces maximum statutory tax for many working households while explicitly extracting additional revenue from top earners. The measure adjusts the definition of modified adjusted gross income for purposes of these rules and builds CPI‑U indexing into several thresholds, which raises implementation and compliance questions for tax administrators and preparers.
At a Glance
What It Does
The bill adds a new limited-application alternative maximum tax provision that effectively caps tax liability for eligible lower- and middle-income individuals at a fixed percentage of income above a legislated cost-of-living exemption. Separately, it creates a new non-refundable surcharge on individual modified adjusted gross income above high-income thresholds, with multiple rate tiers and annual inflation adjustments.
Who It Affects
Directly affects individual taxpayers whose incomes fall near the bill’s cost-of-living measure (including separate rules for single, joint, and head‑of‑household filers) and very-high-income individuals subject to the surcharge. It also imposes new calculation rules that will matter to tax preparers, payroll systems, and the IRS.
Why It Matters
Professionals should watch for a redefinition of the baseline taxable amount (the cost-of-living exemption) and new modified-AGI adjustments that change tax liability calculations. For firms advising high-net-worth clients, the surcharge creates another layer of marginal tax; for compliance teams, CPI indexing and special exceptions introduce operational complexity.
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What This Bill Actually Does
The bill creates a new statutory section that limits an eligible individual’s tax under the regular income tax rules to a fixed percentage of their income above a legislated cost‑of‑living exemption. Eligibility is income‑tested against that same exemption: taxpayers with modified adjusted gross income below 175 percent of the exemption qualify.
The exemption itself is computed from an “annualized cost‑of‑living wage” that starts from a stated baseline wage and is indexed to the Consumer Price Index for All Urban Consumers (CPI‑U), using the Bureau of Labor Statistics September index each year. The bill provides different exemption multiples for single filers, joint filers, and heads of household.
To calculate who benefits, the measure expands the definition of modified adjusted gross income for the cap provision to include amounts normally excluded from gross income such as certain foreign earned income and portions of Social Security benefits that are not otherwise included. The cap operates as a statutory ceiling on tax imposed under the regular income tax provisions: once computed, a taxpayer’s liability cannot exceed that capped amount for the taxable year.To pay for the change, the bill adds a separate part imposing a surcharge on individual taxpayers (noncorporate) with modified adjusted gross income above specified thresholds.
The surcharge is structured in multiple brackets with increasing marginal percentages applied to the amounts within each bracket. The brackets are indexed annually to CPI‑U and the thresholds are increased for joint filers.
The surcharge also includes special rules that adjust thresholds for U.S. citizens and residents living abroad, excludes certain charitable trusts, and specifies that the surcharge is not treated as ‘tax imposed by this chapter’ for purposes of calculating certain credits and interactions with the alternative minimum tax rule in section 55.Both the cap and the surcharge have the same effective date: taxable years beginning after December 31, 2025. The bill also inserts clerical changes into the Internal Revenue Code to add the new sections and parts to the statutory table of contents.
Practically, the changes require tax software, preparers, and the IRS to add new lines and tests for cost‑of‑living indexing, modified‑AGI adjustments, joint‑return multipliers, and the surcharge computation — all of which will show up on individual returns and affect year‑end tax planning.
The Five Things You Need to Know
The cap limits a qualifying individual’s tax under section 1 to 25.5 percent of the taxpayer’s modified adjusted gross income exceeding the cost‑of‑living exemption.
A ‘qualified individual’ is anyone whose modified adjusted gross income is less than 175 percent of the cost‑of‑living exemption for the taxable year (with an exclusion for certain taxpayers listed in section 63(c)(6)).
The cost‑of‑living wage is anchored at $46,000 and then indexed annually using the CPI‑U (September index), with the exemption equal to 100% of that wage for single filers, 200% for joint returns, and 140% for heads of household.
The surcharge (new section 59B) imposes 5% on modified AGI over $1,000,000 up to $2,000,000; 10% on income over $2,000,000 up to $5,000,000; and 12% on income above $5,000,000, with all dollar amounts indexed annually and thresholds increased by 50% for joint filers.
The surcharge’s modified-AGI measure excludes investment interest deductions from adjusted gross income (it reduces AGI by such deductions) and contains special rules lowering the effective thresholds for U.S. taxpayers living abroad and excluding certain charitable trusts.
Section-by-Section Breakdown
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Cap on tax liability for low- and middle-income individuals
This provision inserts a new section limiting the tax under section 1 for an eligible taxpayer to a fixed percentage of income above a legislated cost‑of‑living exemption. The practical effect is a statutory ceiling on liability for filers who meet the income test; the ceiling is computed using a modified AGI concept that adds back certain excluded income types. Because the exemption is scaled by filing status and indexed to the CPI‑U, the provision creates recurring year‑over‑year adjustments that must be reflected in withholding tables and preparer software.
Cost‑of‑living exemption mechanics and indexing
This subsection defines the ‘annualized cost‑of‑living wage’ as a $46,000 baseline adjusted by the ratio of the prior September CPI‑U to the September CPI‑U in the year of enactment. It then specifies filing‑status multipliers (100% single, 200% joint, 140% head of household) to produce the exemption number. That anchoring plus CPI‑U‑for‑September indexing is operationally precise but could produce different effective annual adjustments than other statutory indexation methods, creating timing quirks for returns spanning calendar years.
Modified AGI for the cap
For the cap calculation the bill alters modified adjusted gross income by adding amounts excluded under sections 911, 931, and 933 and by adding back portions of Social Security benefits that are not included in gross income. That choice broadens the income base for the cap’s eligibility test and ceiling calculation, meaning some taxpayers with excluded foreign income or partially excluded Social Security benefits will see different outcomes than under ordinary AGI.
Graduated surcharge on very high incomes
This part creates a standalone surcharge on noncorporate taxpayers’ modified AGI above tiered dollar thresholds with three marginal rates. The thresholds and rates are explicitly indexed to CPI‑U and the bill enlarges thresholds for joint filers by 50 percent. The surcharge calculation uses a modified‑AGI measure that subtracts investment interest deductions, and it contains carveouts and special treatment for citizens and residents abroad and for certain charitable trusts.
Application date and code amendments
Both the cap and the surcharge apply to taxable years beginning after December 31, 2025, and the bill updates the Internal Revenue Code table of sections/parts accordingly. By setting the effective date in this way, the bill requires retrofitting of current-year return preparation processes and creates an immediate need for guidance from the IRS on transitional treatment and forms changes.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Lower- and middle-income wage earners who fall below the eligibility threshold: they receive an explicit statutory cap on tax liability, reducing the maximum tax they can face and potentially lowering effective marginal tax rates for households near the cost-of-living benchmark.
- Heads of household and joint filers with incomes close to the cost‑of‑living exemption: the filing‑status multipliers mean some family configurations get proportionally larger exemptions than single filers.
- Taxpayers with excluded foreign earned income or partial Social Security exclusions who nonetheless have relatively modest overall resources: bringing excluded amounts into the modified‑AGI calculation for the cap can preserve eligibility while ensuring the ceiling reflects their total resources.
Who Bears the Cost
- Very-high-income individuals and households: the newly created surcharge applies at multiple high-income tiers and increases total marginal tax exposure for those above the statutory thresholds.
- Tax preparers and payroll software vendors: they must implement new calculations for the cap, revised modified‑AGI definitions, CPI‑U indexing mechanics, and the surcharge; that implementation will require development, testing, and taxpayer support.
- The IRS and tax administration teams: tasked with issuing guidance, updating forms, and enforcing the new surcharge and cap rules, the agency will face upfront administrative and compliance costs and potential disputes over modified‑AGI calculations.
Key Issues
The Core Tension
The central tension is straightforward but real: the bill reduces maximum tax exposure for working families by tying liability to a living‑wage benchmark, but it funds that relief by significantly increasing marginal tax rates on very high incomes — a political and technical trade‑off that improves progressivity on paper while adding complexity, administrative burden, and new incentives for income‑timing and tax‑planning maneuvers among high‑net‑worth taxpayers.
The bill resolves one distributional choice — protecting low‑ and middle‑income filers from higher statutory tax liability — by creating another: a layered surcharge on top earners. That trade‑off raises several implementation and economic questions.
First, anchoring the exemption to a $46,000 baseline then indexing by the September CPI‑U produces a specific path for threshold growth that can diverge from other indexation rules (for example, those using calendar-year averages), which may create odd spikes or lag effects in certain years. Second, the bill’s decision to add back excluded foreign earned income and certain non‑included Social Security benefits into the modified‑AGI measure narrows the protective reach of the cap in some cases and complicates cross-border and retirement‑income tax planning.
Operationally, the surcharge’s interaction with other provisions is consequential but under-specified: excluding the surcharge from the universe of ‘tax imposed by this chapter’ for certain credit calculations and for section 55 purposes changes how taxpayers compute offsets and AMT interactions. The surcharge’s special rules (citizens abroad, charitable trusts, investment interest adjustments) leave room for litigation and administrative guidance on how to net exclusions, apply offsets, and treat complex estate/trust arrangements.
Finally, because the revenue side depends on behavior at the top end of the income distribution, the ultimate yield is sensitive to compensation timing, income shifting, and tax‑planning responses that could blunt projected revenues or raise fairness questions.
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