For a while there has been nothing but talk about the Bush-era tax cuts. Millionaires wanted them elliminated. Republicans wanted them to remain in place, permanently even. Then this week you heard that Obama announced a deal was made with Republican leaders regarding said tax cuts. But what exactly does it all mean? And how could this new deal effect you?
Bear with me as I try to make sense of it all.
But first, a quick explanation of what these tax cuts are: In 2001, and again in 2003, there were a series of tax breaks that were enacted to help stimulate the economy. If nothing is done, these tax breaks would basically be nonexistent after 2010. Hence the debacle we’re now in.
Now, let’s take a closer look at the provisions in this deal.
1. Tax Rates Tax rates were initially lowered during President Bush’s term. A new 10% tax bracket was created. And most rates dropped by 3%. Should this deal be enacted, the lower rates that we had in 2010 would be the same for 2011 and 2012.
2. Estate Tax This is probably what has upset Democrats the most. The deal makes the top rate 35% with an exemption of 5 million. Yeah, 5 million dollars. At this point, for most Americans, there would be no estate tax for 2010 and 2011. I mean, seriously, that’s a 10 million dollar exemption for a married couple.
3. Capital Gain. These rates would remain at its all-time-low of 15% for long-term gains for two years.
4. Dividends Same as with the capital gain rates, the top rate of 15% would remain the same for two years.
5. Unemployment Benefits. Apparently this is the reason Obama agreed to this deal in the first place. Federal unemployment benefits would be extended through 2011. I’m sure some of those that are out of work are breathing a sigh of relief right now.
6. Payroll tax The social security tax rate would drop from 6.2% to 4.2% on the first $106,800 earned. Note that this rate decrease is for the employees’ portion of social security taxes only. And unlike the other provisions in this deal, this one will only last for 1 year.
7. Child Tax Credit. This was raised to $1,000 per child during the Bush-era. Guess what would be extending for another 2 years? You guessed it. The $3,000 earned income that was needed to make the credit refundable still stands as well.
8. American Opportunity Tax Credit Specifically the modified version of the Hope credit with an increased available deduction of $2,500 – instead of $1,800 – would also remain the same.
9. Earned Income Tax Credit What is probably the most abused and controversial of all tax credits also gets extended. The base amounts were changed to allow more low and middle class family to be eligible for the credit.
10. State and Local Sales Tax Deduction This went away in 2009, and from what I’ve read, there is a posibility that it could be brought back – maybe even without the need to itemize.
11. Deductibility of Real Estate Tax Without Itemizing. You’ve always been able to deduct real estate taxes, but just like last year, you would be able to deudct them even if you didn’t itemize your return. It would simply increase your standard deduction.
12. Transfer of IRA to Charities Taxpayers that are over age 70 1/2 can transfer their IRA balance directly over to a charity.
13. And before I forget, ATM We got a patch. Again. How many times are we going to dance this dance? Seriously? Just get rid of the damn thing already.
And that, my friend, is what this deal would mean for you. Some of it will affect you directly, then again some won’t. But make no mistake about this, it will affect us all. How much do you think all of this is going to cost? If you answered anywhere close to $900 billion, then you’d be right.
President Obama gets unemployment benefits and lower social security tax, and apparently the Republicans got everything else. No wonder the Democrats are upset. So much so that Nancy Pelosi and other House Democrats passed a resolution stating that the package should not come to the floor of the House of Representatives. At least not in its current form. They want changes. Then again, don’t we all.