BREAKDOWN OF NEW TAX CUT DEAL

On Monday, December 6, 2010, President Obama announced a tentative deal with Republicans on 
extending the tax cuts signed by George Bush almost 10 years ago.

Do you understand how this will affect you?

Below you will find a BREAKDOWN of the tax cut deal that has
 been extended for the next 2 years.

Income tax rates
Image: Tax forms

AP

By extending the current rates across the board, you’ll see no change in the basic tax you pay on earned income: those rates will top out at 35 percent. The Obama administration had wanted to let the rate rise for wealthy taxpayers, but under the deal struck with Republicans, everyone gets to keep the current rate for two years.
“It’s going to make a significant difference over the coming year for middle-class taxpayers,” said Melissa Labant, a tax manager for the American Institute of Certified Public Accountants.
Economists expect the combination of maintaining current tax rates, reducing payroll taxes and boosting other tax benefits will induce consumers to spend more and investors to turn more bullish.
Capital gains and dividend
Image: Counting money

Reuters

Current tax rates on long-term capital gains will remain in place for two years. The tax applies to profits from the sale of an asset, such as stock, held more than a year. The highest rate of 15 percent was expected to rise to 20 percent next year.
Investors will also benefit from an extension of the historically low tax rates on dividend income, which top out at 15 percent. Had no action been taken, dividend payments would be taxed as regular income. This would raise the tax rate to as much as 39.6 percent for top earners. The extension means a savings of nearly a quarter on every dollar of dividend income for this group.
Individuals with dividends paid to taxable accounts can collectively expect to save nearly $75 billion over two years, according to an analysis by Standard & Poor’s analyst Howard Silverblatt.
Cliff Caplan, a financial planner and president of Neponset Valley Financial Partners in Norwood, Mass., said the extension of the lower tax rates could lift prices of dividend-paying stocks as they become more popular with investors who can now avoid the higher tax rates for at least two more years.
Estate taxes
Image: Mount Vernon estate

AP file

Wealthy taxpayers also benefit from other provisions of the deal. The estate tax on inherited money, which was eliminated altogether in 2010, was scheduled to return to 2001 levels of taxing estates above $1 million at 55 percent. Under the proposed deal, for the next two years, a new 35 percent estate tax will kick in on estates over $5 million ($10 million for couples).
Except for the temporary repeal of the estate tax this year, the rate has not been less than 45 percent since 1931.
Only about 4,000 to 5,000 estates will likely owe the estate tax under the plan, based on last year’s tax filings. That compares with roughly 7,000 under Obama’s earlier proposal of a 45 percent tax on value exceeding $3.5 million. Although that may not sound like a big difference, House Speaker Nancy Pelosi said the new estate tax proposal will add about $25 billion to the deficit.
Tuition tax credit 
Families with kids in college can benefit from a tax credit for tuition and fees. A maximum of $2,500 will remain in place for two years. A credit reduces taxes owed, versus a deduction which reduces taxable income.
Parents familiar with 529 college savings plans may question what to prioritize. A 529 account encourages savings by enabling account holders to make tax-free withdrawals for eligible college expenses.
Parents should set aside $4,000 per year to maximize the tax credit before contributing to a 529 plan, says Mark Kantrowitz, a college financial aid expert and publisher of FinAid.org. That’s because directly lowering their tax bill exceeds the financial benefit of tax-free distributions.
The extension is welcome assistance: The average annual cost of in-state public four-year schools rose to $7,605 this fall and private college expenses increased to $27,293.
Child tax credit 
There’s more good news if you’re a parent: The $1,000 child tax credit is being extended for two years. Taxpayers with income of less than $75,000 — or $110,000 for married couples filing jointly — qualify for the full amount.
Wealthy taxpayers also benefit from other provisions of the deal. The estate tax on inherited money, which was eliminated altogether in 2010, was scheduled to return to 2001 levels of taxing estates above $1 million at 55 percent. Under the proposed deal, for the next two years, a new 35 percent estate tax will kick in on estates over $5 million ($10 million for couples).
Payroll taxes
Image: Payroll taxes

AP

Everyone will also get a break on their payroll taxes, but wealthy taxpayers will get a slightly better break. In exchange for dropping the so-called Making Work Pay tax credit, all taxpayers will get a two percent break on their Social Security payroll taxes for one year. The old tax credit, which maxed out at $400 ($800 for couples), was limited to people who made less than $95,000 (or couples making $190,000.)
Currently, the government takes 6.2 percent out of your paycheck, up to $106,800, for the Social Security payroll tax. That would drop to 4.2 percent in 2011 and give you an immediate increase in take-home pay. So the more you earn, the more you save.
If you make $50,000 a year you will pay $1,000 less. If you get paid twice a month, you will have an extra $41.67 in your paycheck starting in January.
Anyone who makes more than $106,800 a year will receive the maximum savings of $2,136.
“That certainly provides an added level of dollars to do whatever people were planning on doing, whether that’s saving or spending,” said Greg Rosica, a tax partner at Ernst & Young LLP.
Alternative Minimum Tax
Image: AMT

Getty Images file

Middle class taxpayers get continued protection from a perennial monster called the Alternative Minimum Tax. Under the proposed deal, the existing AMT “patch” will be extended for two more years, saving some 21 million middle class taxpayers from getting hit with these higher rates.
The AMT was enacted in 1969 to make sure wealthy people couldn’t avoid taxes altogether, but it wasn’t indexed for inflation. This means Congress has to raise the amount of income exempt from the AMT each year to spare millions from tax increases averaging about $3,900.
Had no adjustment been made, taxes would have gone up for individuals making as little as $33,750, and married couples making $45,000.
Similarly, a married couple making $85,000 a year with two college-age children would have had to pay $4,500 more in taxes, according to an analysis by The Tax Institute at H&R Block. A married couple making $100,000 a year with two young children would have faced a tax increase of more than $6,100.
Unemployment insurance
Image: Help Wanted sign

AFP – Getty Images

Million of job seekers will benefit from an extension of their benefits at current levels through the end of 2011. The extension applies to workers laid off for more than six months, and less than 99 weeks. Seven million Americans would have lost their benefits through next year without the 13-month extension. Obama’s Council of Economic Advisers estimates the provision will create 600,000 jobs next year.
That’s because the unemployed live on the edge, and tend to spend every dollar they get, rather than save. That spending flows to businesses, putting them in better position to hire.
The average weekly payment for the roughly 8.5 million people receiving unemployment benefits is $302.90. But it varies widely by state, from as little as $119 in Puerto Rico to nearly $420 in Hawaii. Each state sets the amount through a formula meant to replace a portion of an unemployed person’s old income.

source: MSNBC and Washington Post

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