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What does Bush Tax Cuts mean to an average Joe?

[Update: Dec 7th 2010, President Obama and Congress have reached a tentative deal to temporarily extend the Bush tax cuts for all Americans, including the wealthiest.  This deal not only extends the tax cuts from the Bush era but also adds some concessions made by President Obama. To read about the recent tax cut deal package,  click here - What does the tax cut deal mean to me?. If you want to read about the bush era tax cuts in detail continue reading this post]

An epic battle is brewing in the Capitol over what should be done about the expiring Bush tax cuts. Bush Tax Cuts It could be a major factor in shaping the upcoming fall elections. President Obama vowed to never raise taxes for the middle class (Single people earning <$200,000 and Couples earning <$250,000). I believe Mr. President has kept his word and intends to let the tax cuts expire only for the wealthy (Couples earning >$250,000 and Single people earning more than $200,000). All that is good and dandy but its not in his hands alone. He needs Congress’ bipartisan support to do anything. If there is no action, rich and poor, all of us are looking at a higher tax bill than last year. So how will I be affected?

Lets look at all the so-called Bush Tax Cuts and where Mr. President stands.


What changed in 2001 & 2003?


Where President Obama Stands?

Income Tax Brackets

Reduced income tax brackets

  • 35% from 39.6% >$373,650
  • 33% from 36% ($290,250-$373,650)
  • 28% from 31% ($137,300-$209,250)
  • 25% from 28% ($68,000-$127,300)
  • Expanded the 15% bracket ($16,750-$68,000)
  • Created a 10% bracket (up to $16,750)
Allow the tax cuts to expire only for couples earning more than $250,000 and individuals earning more than $200,000 – about 2% of the American households. The top two income tax rates would revert to 36% and 39.6%.
Personal exemptions and itemized deduction

Eased limits on personal exemptions and itemized deductions like mortgage interest and charitable donations for high earners and eliminated entirely by 2010

Phase out personal exemptions and reduce itemized deductions. For the rich (the top two tax brackets) cap itemized deductions at 28%. Under existing law, the tax rises with a taxpayer’s bracket.
Child tax credit


Increased the child tax credit to $1000 for a child from $500.

Standard Deduction

Increased standard deduction for married people filing joint returns.

Dividends and capital gains

Lowered the top rate to 15% on taxes paid by stockholders on corporate dividends

Restore the 20% rate on capital gains. Taxpayers in the top two brackets would also pay 20% on dividends.
Estate tax on inherited wealth


Gradually phased out. In 2003, the first $1 million of an individual’s estate was not taxed. The limit was set to rise in stages, until tax was repealed in 2010.

Restore the 2009 levels, imposing a 45% on inheritances of more than $3.5 million for individuals and $7 million for couples.
Alternate Minimum Tax

Increased the amount of income subject to the tax, which was intended to prevent affluent people from using deductions to avoid paying taxes. But the AMT rapidly expanded its reach into the middle class because it is not adjusted for inflation.

Adjust the AMT for inflation. In recent years, congress has passed temporary fixes every year to keep the fax from hitting the middle class.

So how will I be affected if nothing is done to extend the cuts?

  • Tax Brackets : Mine is definitely going up. EVERYONE’s tax bill is going to go up. The additional tax levied on income earned over $16751 and less than $68000 remains at 15%. In fact the lowest income range will see the most increase with 5%. Example – Person A earns $16,750 and Person B earns $68,000. Person A’s tax bill will go up by $837.5 (5% increase of $16,750) and he will pay $2512.5 total. Person B’s tax bill will be $2512.5 (15% of 16,750) + $7687.5 (15% of $51250) totaling $10200. So Person B’s tax bill also goes up only by $837.5. Which means Person A’s increase would be 5% , person B’s increase would be 1.2% , if I am earning $137,300 my increase would be 1.5% and so on.

Bush-Tax-Cuts-Income-Tax-Brackets

  • Personal exemptions and itemized deduction: I am not sure how this will affect me personally, but from rough calculations, I don’t think I will be  affected by the phase outs of personal exemptions (it is for people earning >$250,000. If this is wrong please let me know).
  • Child tax credit : We don’t have kids so we don’t claim this, but it looks like the rich are not the ones who are “looking” for this credit, so if this provision is allowed to expire, it will hit the poor the most.
  • Standard Deduction : This won’t personally affect us again because we always take the itemized deduction, but most people in my category (married with no mortgage) will be hit by this hard. This basically brings back the “Marriage penalty”. This change made the married standard deduction double the amount of single standard deduction (that seems fair to me). If this expires the married standard deduction will only 167% of the single standard deduction. This will hit the middle class, dual income folks, rich or not.
  • Dividends and capital gains : Even if some action is taken, looks like this is going to increase. And it is not just the rich who have dividends and capital gains. They might get most of their income from it, but the middle class has them too. So I will be paying more in this category.
  • Estate tax on inherited wealth : This is really out of my realm. I know it won’t affect me but I am not sure how it will affect others or who it will affect. If you do know please leave a comment.
  • Alternate Minimum Tax : This should really be adjusted for inflation. Otherwise as time goes on more and more of the middle class is going to be paying this AMT.

Other credits/Cuts expiring too

There are other credits that are expiring this year too… but those are not the talk of the town because we already know they are only a temporary credit.

  • Deductible Premiums for Mortgage Insurance
  • Enhance Health Insurance Credit for Certain Individuals
  • Exclusion of Benefits to Volunteer Firefighters and EMRs
  • Include Computer Equipment as a Higher Education Expense
  • Increase Earned Income Tax Credit
  • Making Work Pay Credit
  • Work Opportunity Tax Credit for Youths and Veterans
  • American Opportunity Tax Credit

Whether we like it or not, looks like we are going to be paying more taxes in 2011. Do you think Congress should extend the cuts? For everyone? Not for the wealthy? Will you be personally affected by any of these?

{ 9 comments… read them below or add one }

Kevin@InvestItWisely

Looks like it’s going to be another hit on an economy that has not yet recovered. OTOH, going into more debt probably won’t help, either…

Reply

Little House

It’s a crime to increase the tax rate by 5% for those earning less than $16,750. It also seems that the middle class with children will be affected as will the top 2% of the earning population. As for myself, based on my salary predictions for this year, my rate isn’t changing. I don’t think this will help our economy in the short term.

Reply

JLP

Little House,

I wouldn’t worry too much for those who make less than $16,750. They usually don’t pay taxes anyway. You should be more worried about the small business employers who will be affected by Obama’s tax code.

Reply

Suba

@Little House I agree with JLP. I don’t think people who make less than $16750 pay any taxes. Personally I think the small business owners and middle class two income folks will be hit the most.

Reply

Money Reasons

Great job with the stats.

According to the adminstrations claims (which many haven’t really been lived up to yet), I shouldn’t be affected directly. But indirectly I will be, as we all will be.

Reply

Lauren

Does anybody here know how income taxes are calculated? If the tax cut expires on that bottom bracket, EVERYONE whose taxable income is more that 16,750 will pay an additional $837.50 on that first 16,750 of taxable income (16,750 * .05). That’s almost $70/month, plus the $67/month (for a married couple) Making Work Pay tax cut will expire in January as well. If the child tax credit increase expires, that’s another $42/month per child. So if nothing happens, in January my tax withheld will be $221 more than in December – $2652 per year – and my taxable income is in the $16,751-68,000 “sweet spot”.

I’m pretty sure the 10% bracket and the child tax credits will be extended, though. You can’t raise taxes that much when people are already feeling the pinch due to wage stagnation. Consumer spending would collapse, a double-dip recession would ensue, and Dems would be thrown out of office by the bucketful.

Reply

The Biz of Life

To me all the chatter about the Bush tax cuts is just noise hiding the bigger problem. In the history of the country, government spending has rarely been more out of control and totally lacking any kind of discipline. It is biggest national security threat today, a much bigger danger than terrorism. The massive borrowing and spending is choking out any hope of economic recovery, but there is no will power in DC to change their bad habits.

Reply

Kevin@InvestItWisely

So are we heading toward a Paul Verhoeven-esque future? What do you think, Biz?

I am personally not a survivalist/doom&gloomer, but I believe a lot of what they say has merit. Just tone down the “results” part somewhat and I don’t think it’s all that inaccurate…

Reply

s simpson

According to IRS, 1/4 of 1% pay any estate tax. So the claims of hurting family farms and businesses is unrealistic

Reply

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