Update: This bill has been approved and signed into law on December 17th, 2010. President Obama has signed into law the tax cut bill 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. The entire package is supposed to cost us $900 billion over the next 2 years. I am not going to discuss the politics of this tax cut deal in this post. From the looks of it, the deal will pass. So lets stick to what these tax cuts actually mean to us, the average folk.
Income tax
The income tax will not change from what it is this year, for at least 2 more years. If the tax cuts were not extended they would have gone up. The 2011 tax brackets (same as 2010 tax brackets)
| Tax rate | Single filers | Married filing jointly or qualifying widow/widower | Married filing separately | Head of household |
| 10.00% | Up to $8,375 | Up to $16,750 | Up to $8,375 | Up to $11,950 |
| 15.00% | $8,376 – $34,000 | $16,751 – $68,000 | $8,376 – $34,000 | $11,951 – $45,550 |
| 25.00% | $34,001 – $82,400 | $68,001 – $137,300 | $34,001 – $68,650 | $45,551 – $117,650 |
| 28.00% | $82,401 – $171,850 | $137,301 – $209,250 | $68,651 – $104,625 | $117,651 – $190,550 |
| 33.00% | $171,851 – $373,650 | $209,251 – $373,650 | $104,626 – $186,825 | $190,551 – $373,650 |
| 35.00% | $373,651 or more | $373,651 or more | $186,826 or more | $373,651 or more |
Payroll tax
This is a surprise addition to the package. The social security tax, which is 6.2% of income up to $106,800 has been reduced to 4.2% for the next year. This reduction applies to the employee part of the social security tax. So if you are self employed and paying 6.2% (employee part) + 6.2% (employer part), you will be paying 4.2% (employee part) + 6.2% (employer part) = 10.4% of your income. This means if you earn $50000, you will pay $1000 less in social security taxes next year. If you earn more than $106,800, this tax cut will mean $2,136 in social security tax savings.
Estate tax
Federal Estate tax was repealed for one year in 2010, it was set to return in 2011. In 2011, it was supposed to be 55% of the value of the estate after the first $1 million. With this tax cut deal, the estate tax will be 35% after the first $5 million.
Capital gains / Dividends tax
The top 15% rate for long term capital gains and dividends will remain in place for the next 2 years. Without this deal the top capital gains tax would have increased to 20% and dividends would have been taxed as regular income.
Alternative minimum tax
The AMT has been adjusted so that more than 21 million tax payers will be reprieved from Alternative minimum tax. Had no adjustment been made, taxes would have gone up for individuals making as little as $33,750, and married couples making $45,000.
Child Tax Credit & Earned Income tax credit
The $1,000 tax credit for each qualifying child is being extended for two years. Single tax payers with income < $75,000 and married tax payers with income up to $110,000 can get the full credit. The credit starts to phase out if the income exceeds that limit. For low income families, part of the credit is refundable, meaning, you are eligible to receive money back even if you do not owe any federal taxes. The expanded version of the Earned income tax credit for the low income families stays for another 2 years as well.
Tuition Tax credit
The American Opportunity Tax Credit, which covers the qualifying tuition and related expenses for the first four years of post-secondary education is renewed for two more years. The full credit, $2,500, is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for married people filing joint returns who earn $160,000 to $180,000 and for singles earning $80,000 to $90,000. A portion of the American Opportunity Tax Credit, 40%, is refundable even if you do not have a tax liability.
Unemployment Benefits
The tax cut deal extends the long term unemployment benefits for another 13 months. The unemployment benefits have started to run out for a lot of people. This 13 month extension is supposed to benefit seven million people.
Business write offs
The deal would allow businesses to write off certain capital expenses (for the next 2 yrs) instead of depreciating over the next several years.
This bill has been approved and signed into law on December 17th, 2010. So, what do you think of this plan? Do you love it, hate it, don’t care?
{ 11 comments… read them below or add one }
Very interesting. Puts it in a different persepctive. I, as an average Joe, finally understood what it holds for me. I am just glad that our taxes didn’t go up. We owe every year, so hopefully this and next year will be a little easier on us.
I like the tax cut especially the 2% pay roll tax cut. Extra money will really come in handy with the baby coming next year.
The information was very helpful in understanding what the tax cut means to me.
Thanks,
BR
This information was helpful in understanding how I will be affected if I started a payroll in my future business.
I love the tax cuts! I wish the AMT would just go away, but that is a pipe dream I suppose. I always end up owing at the end of the year anyway, but I would love to owe less!
Leigh Mutert with H&R Block here. I agree with Everyday Tips. AMT really wasn’t designed to affect Average Joes. It seems such a waste of legislative time and money to keep the AMT system in place and fix it year-after-year. I’m happy that they will be passing a patch for 2010, but would rather see it be eliminated entirely.
Excellent post! Love it when a current topic is broken down so that it is easy to grasp!
I don’t think I’ll even have SS when I retire! So Yay to the Payroll tax!
I wonder why the social security tax went down. Thank you for explaining this in plain English. Being a dual income family, I’m relieved to know that my entire income isn’t going to go to the tax man. If you’re going to penalize people for having 2 incomes, then you should at least let me deduct 100% of my childcare expenses vs the $5K drop in the bucket that exists today.
@firstgen I appreciate the taxes going down for us. I hate to think how much tax we pay. We get <40 of out gross as take home (to be fair that does include 401k, but not maxed out). But I think with the state the SSA is, if this is a wise move. It will be very difficult to reinstate the 6.2. Whoever does that will be marked as a tax “increaser” don’t know how the already almost-bankrupt SSA is going to cope up with this tax holiday.
What tax cuts?? I just got $21 in federal taxes ripped outta my pocket for this pay period. Yeah, I’m one of those lazy, no good federal employees that’s taking food out of poor babies’ mouths. I am on the bottom of the pay scale people, I don’t make NEAR what the fat cat-allegedly-well-to-do federal employee makes. Oh yeah, don’t we got it made, don’t we live in the lap of luxury, the life of Riley! I make 30,000 before taxes. That doesn’t leave me with much for groceries or bills. I don’t deserve this misplaced outrage.
I appreciate this explanation but still have a question? Does paying less in to social security due to this tax cut affect how much my social security balance is for determining how much I can collect when I need to use social security? It seems to me it will? So instead of costing me now while I am working it will cost me when I retire?
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