The bill inserts a new section (1A) into the Internal Revenue Code that caps an individual’s tax at 25.5% of income above a statutory cost-of-living exemption for taxpayers whose modified adjusted gross income (MAGI) is below 175% of that exemption. The cost-of-living exemption is anchored to a $46,000 baseline and adjusted by the CPI–U; filing-status multipliers raise the exemption for joint returns and heads of household.
To offset revenue effects, the bill creates a new Part VIII imposing a surcharge (Sec. 59B) on high-income individuals with MAGI above tiered thresholds ($1M, $2M, $5M in 2026 dollars) taxed at 5%, 10%, and 12% respectively, with indexing and a 50% increase in thresholds for joint filers. Both changes apply to taxable years beginning after December 31, 2025.
At a Glance
What It Does
The bill caps tax liability for qualifying low- and middle-income taxpayers by limiting the tax under section 1 to 25.5% of the taxpayer’s MAGI in excess of a CPI-indexed cost-of-living exemption. Separately, it imposes a graduated surcharge on individuals with very high MAGI (three tiers: 5%, 10%, 12%).
Who It Affects
Directly affects individual taxpayers across the income distribution: taxpayers with MAGI below 175% of the cost-of-living exemption may pay less tax, while taxpayers with MAGI above the surcharge thresholds will face additional surtaxes. The IRS and tax preparers will face new computation and reporting tasks.
Why It Matters
The bill redefines the tax treatment of income tied to basic living expenses and introduces a targeted revenue-raising surcharge on top earners — shifting the distributional profile of the individual income tax and creating new points of interaction with existing rules (foreign-earned income exclusions, Social Security taxation, investment interest deduction).
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
The bill does two principal things. First, it creates a statutory mechanism — codified as section 1A — that limits the tax under section 1 for certain low- and middle-income taxpayers.
If a taxpayer qualifies (their modified adjusted gross income is less than 175% of a cost-of-living exemption), the taxpayer’s section 1 tax cannot exceed 25.5% of the difference between their MAGI and that exemption. The purpose is to ensure that income needed to meet a defined “cost-of-living” threshold is effectively taxed no higher than a capped rate.
The cost-of-living exemption is mechanically constructed from a $46,000 baseline described as the “annualized cost-of-living wage,” which is indexed forward using the CPI–U (September of the prior year) and multiplied by filing-status factors: 100% for single filers, 200% for joint filers, and 140% for heads of household. The bill also defines MAGI for this purpose by adding back certain exclusions that normally reduce AGI — specifically amounts excluded under sections 911, 931, and 933 (foreign-earned income exclusions and certain foreign income rules) and the portion of Social Security benefits that is excluded from gross income — so that the capped tax calculation captures those economic resources.Second, the bill adds a new Part VIII (section 59B) that imposes a surcharge on very high-income individuals.
The surcharge applies in addition to other taxes and is calculated in three marginal tiers: 5% on MAGI over $1 million up to $2 million, 10% on MAGI over $2 million up to $5 million, and 12% on MAGI over $5 million. The thresholds are indexed annually for inflation (CPI–U), and joint filers receive a 50% increase of each threshold.
For the surcharge, the statute uses a different MAGI concept (AGI reduced by deductions for investment interest) and includes special rules for U.S. citizens and residents living abroad (thresholds reduced by excluded foreign income), certain charitable trusts (exemption), and administrative treatment (the surcharge is not treated as a tax for purposes of certain credits or section 55).Both changes become effective for taxable years beginning after December 31, 2025. The two elements interact: the cap targets protection of a CPI-indexed measure of necessary living income, while the surcharge targets incremental revenue from the top tail.
Implementation will require the IRS to add new computations, forms or worksheets to capture the distinct MAGI definitions, the CPI-based indexing, and the various special rules that adjust thresholds or carve out particular entities.
The Five Things You Need to Know
Section 1A caps the tax under section 1 at 25.5% of the taxpayer’s modified adjusted gross income (MAGI) above a CPI-indexed cost-of-living exemption for taxpayers with MAGI below 175% of that exemption.
The cost-of-living exemption starts from a $46,000 ‘annualized cost-of-living wage’ and is indexed by the CPI–U (September of the prior year) and scaled by filing status (100% single, 200% joint, 140% head of household).
The bill defines MAGI for the cap by adding back foreign-earned income exclusions (sections 911, 931, 933) and the portion of Social Security benefits excluded from gross income, so excluded economic resources influence qualification and the cap calculation.
New Sec. 59B imposes a graduated surcharge on individuals: 5% of MAGI over $1M up to $2M, 10% over $2M up to $5M, and 12% over $5M (2026-dollar bases), with annual CPI–U indexing and thresholds increased by 50% for joint filers.
Special rules: the surcharge’s MAGI excludes the investment-interest deduction, thresholds are reduced for U.S. citizens/residents living abroad by their excluded foreign income, certain charitable trusts are exempt, and the surcharge is excluded from calculations for some credits and section 55.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Short title
Declares the Act’s short title as the “Working Americans’ Tax Cut Act.” This is purely formal but helps identify the statute in later citations and regulations.
Alternative maximum tax (25.5% cap) and qualifying taxpayer test
Adds a new section 1A that limits the tax imposed under section 1 for a ‘qualified individual’ to 25.5% of the excess of MAGI over the cost-of-living exemption. It also defines a ‘qualified individual’ as one whose MAGI is less than 175% of that exemption and explicitly excludes persons listed in section 63(c)(6) (typically certain dependent taxpayers). Practically, this functions like an AMT-style cap targeted at lower- and middle-income filers rather than a broad AMT redefinition.
Cost-of-living exemption and MAGI definition
Gives the formula for the cost-of-living exemption: the $46,000 annualized baseline multiplied by a CPI–U ratio to index forward, then multiplied by filing-status factors (100%/200%/140%). It also sets the MAGI used for the cap as AGI increased by amounts excluded under sections 911, 931, 933 (foreign exclusion rules) and by the non-taxed portion of Social Security — a deliberate choice to capture resources that conventional AGI omits and to prevent exclusion-based qualification gaming.
Graduated surcharge on high-income individuals
Creates Part VIII and section 59B to impose an additional surtax on non-corporate taxpayers using three marginal rates tied to MAGI thresholds: 5% (>$1M–$2M), 10% (>$2M–$5M), and 12% (>$5M). The provision includes an inflation-adjustment formula using CPI–U, a 50% threshold increase for joint filers, and a specialized MAGI definition for the surcharge that reduces AGI by the investment-interest deduction (section 163(d)).
Special rules, exclusions, and effective dates
Contains carve-outs and administrative rules: thresholds are reduced for citizens/residents living abroad by amounts excluded under section 911; charitable trusts described in section 170(c)(2)(B) are excluded from the surcharge; the surcharge is not treated as a tax ‘imposed by this chapter’ for purposes of certain credits or section 55 (AMT interaction). Clerical amendments update the table of sections, and both the cap and the surcharge apply to taxable years beginning after December 31, 2025.
This bill is one of many.
Codify tracks hundreds of bills on Finance across all five countries.
Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Low- and middle-income taxpayers whose MAGI falls below 175% of the CPI-indexed cost-of-living exemption — they face an absolute cap (25.5%) on tax computed above the exemption, which can reduce marginal and total tax liability compared with current law.
- Households filing jointly and heads of household — because the exemption is scaled (200% for joint, 140% for heads of household), many multi-earner households receive a larger protected income band than single filers.
- Recipients of Social Security benefits who otherwise would have little or no taxable Social Security — because the cap’s MAGI adds back non-taxed portions of Social Security, some beneficiaries who would otherwise fall into higher effective tax rates may qualify for the cap and see lower overall taxes compared with an uncapped computation.
- Policymakers and budget analysts seeking a revenue-offsetting design — the surcharge on top earners provides a targeted revenue source intended to finance the lower tax exposure for lower-income groups without altering statutory tax rates.
Who Bears the Cost
- Very high-income individuals (those with MAGI above the statutory thresholds) — they pay the new surtax tiers (5/10/12%) in addition to ordinary income taxes and other surtaxes.
- Taxpayers with significant foreign-earned income who live abroad — the rules reduce surcharge thresholds by excluded foreign income, exposing some expatriates to surtax liability they previously avoided, and complicating planning.
- The IRS — new MAGI definitions, CPI indexing, threshold adjustments, and carve-outs will require new forms, guidance, and audit focus; administrative burden and upfront implementation costs are likely.
- Tax preparers and payroll software vendors — they must implement two distinct MAGI computations, incorporate CPI–U indexing mechanics, and apply special rules (foreign exclusions, Social Security add-backs, investment-interest deduction adjustments), increasing compliance complexity and cost.
Key Issues
The Core Tension
The bill’s central dilemma is between protecting a CPI-indexed ‘basic living’ band of income for lower- and middle-income taxpayers (and thus lowering marginal tax burden on necessary living expenses) and raising progressive revenue from the top tail via a new surcharge — a dual objective that requires different MAGI constructs, produces interactional complexity, and invites behavioral responses that could undermine either the relief or the revenue targets.
The bill layers two new, materially different MAGI concepts into the individual tax code: one (for the 25.5% cap) that adds back foreign-earned exclusions and non-taxed Social Security, and another (for the surcharge) that reduces AGI by investment-interest deductions. Those asymmetries create planning opportunities and raise administrability questions: taxpayers may recharacterize income or accelerate deductions to shift between MAGI definitions, and preparers will need clear worksheets to reconcile the two bases.
Indexing mechanics lean on the CPI–U measured in September of the preceding calendar year; while workable, that choice creates lag effects (the baseline is updated once per year using a single-month index) that could misalign the exemption with real-time cost pressures in high-inflation periods. The surcharge’s carve-out for certain charitable trusts and the rule that the surcharge “shall not be treated as tax imposed by this chapter” for credits or section 55 reduce some interactions but leave unresolved questions about how the surcharge integrates with refundable credit phase-ins, AMT calculations, and other downstream provisions.
Finally, adding back excluded foreign income for the cap while reducing surcharge thresholds by excluded foreign income produces conflicting incentives for cross-border workers, complicating neutral tax treatment of international earnings.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.