Wednesday, December 8, 2010

Bush...errrr....Obama Tax Cuts: Whats New and How Will They Affect You?

While you will be hard-pressed to find anyone who agrees entirely with the extension and additions to the Bush-Era Tax Cuts (or Middle Class Tax Cuts as the White House has been calling them), it looks like we finally have some certainty moving into 2011. Will we see a decrease in unemployment and significant economic growth as a result of the cuts? That is to be determined.

President Obama held a press conference yesterday to address the extension of the tax cuts:

So now that it is almost certain that the tax cuts are coming back, what will that actually mean for taxpayers? We have included a list below highlighting the major additions coming out:

1. Welcome Back Estate Tax
The Estate Tax is back, following its one-year vacation. While heirs around the country feared that the estate tax could return to affect estates exceeding $1 million with rates of 55%, a very different, and somewhat unexpected, situation has arisen. It now appears that the exemption will increase to $5 million, with a mere 35% tax placed on estates in excess of the exemption.

2. The Payroll Tax Holiday
The employee portion of social security taxes is set to decrease by around 30% for the next year (from 6.2% to 4.2%). Working individuals should expect significant savings on their payroll taxes, capping out at around $2,136 (2% of $106,800, the income limit for social security deductions). This could be very significant, especially in comparison to the $400 per person Making Work Pay Credit from'09 and '10, and the Stimulus Credit of $600 per person from '08 (although the latter was also awarded for children and non-working spouses).

3. Earned Income Tax Credit (EITC) Expansion
The EITC has been expanded to provide, on average, $600 in additional assistance to families with 3 or more children. The expansion is set to last for the next two years.

Aside from whats new, many items have been extended as is. Theses include:
  • The Child Tax Credit: Currently set to remain at a maximum of $1,000 per child.
  • American Opportunity Tax Credit: Students should still be able to receive a maximum of $2,500 for their tuition, fees, books and supplies as long as the expenses were incurred during the first four years of post-secondary school.
  • The Child Tax Credit: Currently set to remain at a maximum of $1,000 per child.
  • Capital Gains: Capital gain rates should remain consistent with 2010. That means long-term rates will likely max out at 15%.

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