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Two More Years of Tax Cuts (Here’s What The Extension Means For You)


The recent Congressional debate on whether to extend Bush-era tax cuts was long and drawn out, but it looks like our government may have finally reached a compromise, conclusion, agreement—whatever you’d like to call it—for now, anyway.

But how do these tax cuts REALLY affect you?

Since many of the tax cuts are extensions (not new tax breaks), you may not experience anything new. However, here is a rundown of the tax cuts that were extended for the next two years:

Individual Income Tax Rates. Perhaps the most anticipated extension was for individual income tax bracket rates. With this extension, tax brackets will not change for 2011 and 2012. They’ll stay at the current (but possibly temporary) rates of 10%, 15%, 25%, 28%, 33%, and 35% as opposed to the 15% (for the lowest two brackets), 28%, 31%, 35%, and 39.6% that would have been re-instated had the cuts not been extended.

Federal Estate Tax. Towards the end of the compromise, Congress debated the estate tax issue heavily. In fact, there were rumors that the estate tax would bring the entire extension bill to a halt. In the end, Congress agreed that estates less than $5 million will not be taxed at all for 2011 and 2012. For estates greater than that amount, the tax rate is 35%. This exemption is one of the largest exemptions for estates in history. However, the exemption is only temporary and things could very well change after 2012.

Capital Gains and Dividends Tax Rates. Long-term capital gains (gains on investments, sale of property) and dividends are taxed at rates lower than individual income tax rates (short-term gains are taxed at individual income tax rates). Economists argue that lower capital gains tax helps to stimulate the economy. For 2011 and 2012, individuals in the 10% and 15% tax brackets will not be taxed on capital gains while all other taxpayers will pay 15% on capital gains and dividends. If you are in a low tax bracket, the next two years are prime time to cash in well-performing investments and sell property.

Payroll Tax Holiday. Employees are well aware that many taxes are deducted from their regular paychecks. Employees pay 6.2% in various social security taxes, and, for 2011, that amount will be lowered by 2% to 4.2% (employers will still pay the full 6.2%). Some experts have warned that this short-lived tax cut will cause administration nightmares for tax preparers and employers similar to the problems that the Making Work Pay credit created in 2009.

Alternative Minimum Tax (AMT). Before the tax cut extension bill was signed, many worried that the AMT would begin to affect more and more middle-class taxpayers. While regular income tax brackets are indexed for inflation, the AMT exemptions are not. However, since the exemption amounts were increased in the bill, many middle-class taxpayers will not be affected by the AMT for 2011.

Earned Income Tax Credit. This tax credit is helpful for many low income taxpayers. The extension bill expanded qualifications for the credit so that more families will be eligible for the credit in 2011 and 2012.

Education Credits. Several education tax cuts were extended included the Hope education credit, employer-provided educational assistance exemptions, and an increased income phase-out for the student loan interest deduction. In addition, benefits for the Coverdell savings accounts were improved: Through 2012, you can contribute up to $2,000 per year and use the money for some costs associated with schooling before college, as well as college expenses.

Many of these tax breaks will prove to be very helpful for Americans through 2012. Many hope that the tax cuts will even help to stimulate our economy a bit. Still, these extensions are temporary and only scheduled to last through 2012, so things could change drastically after two years.

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About Amber Gilstrap

Amber is a twenty-something CPA from Kansas City, Missouri who loves writing, working out, and---of course---finding fresh ideas for saving money. Follow her on twitter @ambergilstrap.

Comments

  1. I wasn’t a big fan of extending the tax cuts, but overall I think this is a good compromise. I’m happy to see that emergency unemployment was extended so that folks won’t be completely without during the holidays.