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Photo: jurvetson ShareThis Share On December 17th, 2010, President Obama signed a $858-billion tax-cut package into law. Here are the important points in this package that may affect your personal finances.
Bush Tax Cuts ExtendedFirst of all, the tax cuts put into place by President Bush in 2001 and 2003 are extended for all income levels for two years, until the end of 2012. This means that the lower tax brackets we have enjoyed for the past decade will not change very much. Capital gains and dividends will still be taxed at the current rates, so there is no need to sell all your investments at the end of this year in anticipation of higher capital gains rates. The $1,000-per-child refundable tax credit is also staying for at least two more years instead of reverting to $500 per child. Another important consequence of the Bush tax cuts is that the marriage penalty was lessened for couples where the husband and wife have similar incomes. Since Obama extended these tax cuts, this means that the marriage penalty will not increase.
Payroll Taxes ReducedThe Social Security taxes paid on wages will be reduced 2% for 2011 only. Basically, workers will pay 4.2% of their wages instead of 6.2% in 2011. The wage ceiling for Social Security taxes is $106,800, so this means that the maximum amount a person could save is $2,136. This is a good opportunity for everyone to contribute the 2% savings to a retirement account since you are given a reprieve from funding someone else's retirement.
Inheritance Tax Comes Back with a Smaller BiteIn 2010 the inheritance tax actually didn't exist due to Bush's tax package. In 2011 it is coming back, but it is much less harsh than the inheritance tax rates in the Clinton era. The Obama plan approved a 35% tax rate on estates worth over $5 million. Basically, estates under $5 million will pay no taxes, and that exempts most estates. If Obama did nothing, then the estate tax rate would have reverted back to 55% for estates over $1 million.
Alternative Minimum Tax Patched AgainThe alternative minimum tax is a parallel tax system established in 1982 to guarantee that everyone pays at least some taxes, regardless of deductions. However, the problem with this tax system is that the exemption is not indexed for inflation, so if Congress does not change the law every year, more and more people are affected by the AMT. In this package, the alternative minimum tax patch is continuing into 2011, so millions of middle class families will not have to pay more taxes. The exemption is now $74,450 for married joint filers and $48,450 for single filers.
Unemployment Benefits ExtendedThe current levels of unemployment benefits will be intact for another 13 months. This doesn't mean that everybody is getting 13 more months of unemployment checks. What this means is that if the federal government decided not to pass this law, then unemployment benefits would stop at 26 weeks. Now that this law has passed, those who have not exhausted all their unemployment benefits will be able to collect the maximum amount of unemployment benefits allowed in their state for another 13 months. However, those who have already collected the maximum 99 weeks of benefits will not get any extension.
In summary, this package was passed so that Americans will not feel a huge change in their finances. If Congress and President Obama did nothing, then the Bush tax cuts would have expired by law and everyone would have had to pay more taxes. However, the package pretty much guarantees that taxes will have to be raised in the future because this is basically more deficit spending. It's in the spirit of "consume now and pay the consequences later," and it seems to be the American way.
What do you think? How will your finances be impacted by this law?
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22 Dec. 2010 | 5:00 AM Krogenar #1 I have a question: why did the writer of this article title it "The Obama Tax-Cut Deal" -- there are no tax cuts in the deal! In fact, the estate tax (affectionately known as 'The Death Tax') makes a return. So this should really be called 'The Obama Tax Increase Deal'. Oh, and unemployment is extended for another year. So, to review:
1. Taxes aren't going up significantly. (Not a tax 'cut', just a refusal to raise taxes.)
2. The estate tax makes a comeback.
3. More unemployment benefits (subsidizing unemployment further, increasing our debt).
And it's all headed up by a picture of Obama smiling like a retard. It should be captioned, "We decided not to cut our own throats completely, hooray for us!"
REPLY
23 Dec. 2010 | 7:19 AM Matt #2 Actually, since the "bush era" tax cuts were set to expire, you could argue that it IS a tax cut deal. The taxes would have risen if Obama hadn't compromised with Congress (particularly Republican Senators) you'd be paying Clinton era taxes again!
But the real question is why are you so short-sighted. Here's why unemployment benefits are important:
1. Many people were recently employed and are now out of work.
2. The lifestyle they cultivated while they were gainfully employed is what drives the economy forward.
3. They can only maintain UI benefits if they can prove that they are actually searching diligently for a job so we're not subsidizing unemployment.
4. In order to maintain the economic recovery, consumers must continue to spend money to fuel growth.
5. Without UI benefits, people who have the lifestyle of say, a software engineer, who are now unemployed will no longer be able to contribute to the economy.
6. You should be getting the picture by now. Untill we fix the fact that there is a huge amount of what is basically artificial unemployment in this country, we need to support our economy or it will continue to shrink. It is morons like you and thinking like yours that got us into this mess in the first place. You had 8 years to screw everything up, please shut up now while we fix it.
Sincerely,
your friendly neighborhood UI benefits Civil Servant
23 Dec. 2010 | 7:55 AM Guest #3 Some points
Payroll tax has been reduced, hence tax cut.
Taxes were scheduled to increase, now they are not... hence tax cut.
The death tax hasn't gone anywhere, nullifying your point.
Cutting off unemployment in this economy would make things worse.
Actually think, when you make a comment.... it might help in the future.
22 Dec. 2010 | 7:38 AM Guest #4 How about cutting spending _and_ taxes?
REPLY 22 Dec. 2010 | 10:11 AM Guest #5 Because cutting spending = cutting jobs. You want to do that in this economy?
22 Dec. 2010 | 8:08 AM paul@brokeforcollege #6 I certainly don't agree with the extension of the tax breaks for the rich but I believe that the bigger issue, and the aspect that should have been the center of this issue, is the GOP holding unemployment benefits to ransom so that they could win the unneeded tax breaks for rich people.
The one thing in this that I give Obama credit for is that he has at least been honest that this compromise was the wrong thing for the country but that he did it to get the unemployment benefits from under the thumb of the GOP.
REPLY 22 Dec. 2010 | 12:58 PM Guest #7 Please site your source. Where did obama say this was a bad idea or that it was to get unemployment out from the thumb of the GOP. I'm not in favor of the tax cuts being extended, or the social security tax cut, but I haven't seen anything to support this claim. It was a negotiated deal, but not a ransom.
Its also worth noteing that even with these tax cuts the top 25% of pay 97% of the taxes in this country. Its funny that everyone always wants to rais there taxes and thinks its unfair and that they get out of paying taxes in spite of the fact that there is no evidence what so ever to support it. You want to see more jobs lost go tell the person paying your paycheck he/she is going to loose another 2% of his income.
The fact is people making over $200,000 a year pay for almost all of the social services that everyone making less then that takes advantage of.
P.S. I make well under $200,000 a year, so I thank those that pay to keep my taxes down. God knows I couldn't afford to pay my rent if we all paid the same percentage.
22 Dec. 2010 | 5:38 PM Another guest #8 Did you even read the article? the tax cuts were extended for EVERYONE, not just the rich. All this rhetoric about the tax cuts only benefitting the rich is pure BS. Check out the marriage penalty before the bush tax cuts and you'll see that even families making 40000 to 50000 are affected. Not to mention that the child tax credit can't even be claimed by families making a bit over 100k. Please check your facts before regurgitation stuff you read on huffpo. I think this wise bread article is very fair reporting.
22 Dec. 2010 | 9:09 AM Chris #9 or MAYBE the Gov't spends a bit less, no?
Isn't just saying "tax the rich!" a bandaid and not a long-term solution to deficit problems? This is like a person always saying, "I'm broke, therefore I must make more money", as opposed to looking into where their money is going in the first place.
REPLY 22 Dec. 2010 | 9:58 AM Mike in Austin #10 Completely irresponsible.
The answer is that any savings you think you will garner will become worthless as the money becomes worthless.
This overall lack of fiscal conservatism will sooner rather than later, cause a lack of faith in buying US backed bonds.
This will cause interest rates to go up. So for every "penny" you save in tax cuts, you'll pay back in additional interest over time.
REPLY 22 Dec. 2010 | 10:43 AM Guest #11 It's the 'American Way' because we have too many old people (read: Baby Boomers) who care less about the Youth of this nation than they do their own silvery pockets. Also, Corporations (who are usually headed by said old people) have vastly more power over the handful of consumers willing to stand up to them. Trust me when I say that if we were to elect a 30-something into the high-profile public offices, things would be radically changed. Maybe not for the worse, but certainly better than now.
REPLY 22 Dec. 2010 | 11:42 AM Pat S. #12 I'm conflicted on the tax cuts. On one hand, we must continue to support the unemployed. On the other, I fear for the long term economic health of the United States. Hopefully Congress will look more deeply into the debt reduction strategies offered by the Obama's debt commission panel.
www.compoundingreturns.blogspot.com
22 Dec. 2010 | 12:18 PM Moira #13 The 2% payroll tax break is a disaster for Social Security. Yeah, you do "pay for someone else's retirement" but that is how it works, the current worker pays for those that are receiving social security.
Social Security is solvent for the next 29 years, those who say it isn't are LIARS and this is the first in a series of steps for conservatives to trick the American people by saying "hey you get more money". But not adding that you get more money today by robbing yourself tomorrow.
I wish the author of this article had thought that phrase out a little more. Irresponsible.
REPLY 22 Dec. 2010 | 5:44 PM Another guest #14 How is the authoR of this irresponsible for stating the truth? From her profile it looks like she is in her twenties like me. Why should we pay into a system that will give us no return? Also I don't understand how this is a "conservative trick" like you say. It looks like this cut was endorse by Obama to replace the making work pay credit he handed out last year.
22 Dec. 2010 | 9:29 PM Guest #15 I have to pay SECA rather than FICA tax...will my rate be reduced by 2% as well?
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