I'm glad they were able to pass this in the lame duck. Hopefully, a few people were able to enjoy Christmas more when the found out their UI check was in the mail. I'll also enjoy the extra money on my paycheck next year from the payroll cut. :)
If you pay attention to any news you’re probably aware of all the tax bill talk that’s been going on for the last few weeks. At one time it looked like it was going to pass without issue, then Democrats were upset about some of the features and vowed to block it. Then it went back and forth a bit with an uncertain future, but as of last week it finally made it through all of its hurdles and we have an approved and signed bill.
That’s great and all, but what does it mean for the the Average Joe? Sure, we hear a lot about the lower tax rates being extended to the wealthiest Americans since that’s a great political talking point, but what about everybody else? The good news is that even if you aren’t super rich and bringing in a quarter of a million dollars a year you’re still going to see a benefit to your bottom line.
Tax Rates and Payroll Taxes
The biggest item of this bill was obviously extending the existing tax rates for another two years. Introduced by President Bush back in 2001 and 2003, the tax rates we’ve been used to over the years will continue for everybody for the next two years. This means there shouldn’t be any surprises next year unless your income actually increases and bumps you up to another tax rate. Without this extension most people would have seen a higher tax bill in 2011, so that is good news.
Not only were tax rates extended, but the bill introduces a new payroll tax holiday for one year. In 2011 that means you’ll pay 2% less in payroll taxes, which provides an immediate boost to your take home pay. You typically pay 6.2%, but for the next year you’ll only be paying 4.2%. To give you an idea, that equals about an $800 savings for somebody earning $40,000 a year. That’s good news for your wallet, but I’m not sure how this goes towards helping out failing Social Security program. Only time will tell.
Another hot-button topic in this bill surrounded the unemployment benefit extension. It has already been extended in most cases, but with continued high unemployment it was a priority to get benefits extended even further. So, will you be able to take advantage of the unemployment benefit extension? Well, not if you’ve already exhausted 99 weeks of benefits. The new law keeps that the maximum anyone can receive. But the law does renew federal programs that expired last month, extending benefits beyond the 26 weeks states provide. Federal funding now goes through Jan. 7, 2012.
Other Notable Changes
Those are the two big issues, but there are a number of items that made their way into the bill that will affect some, but not many. One is the estate tax. The estate tax expired this year and was slated to come back next year with a 55% tax rate on estates over $1 million, but instead the estate tax is being reinstated with a rate of 35% and a $5 million exemption. There was also a small piece of legislation to address the Alternative Minimum Tax (AMT), which in its current form does affect more people than it probably should, and usually unexpectedly. The $1,000 child tax credit was also extended, along with the Earned Income Tax Credit. This two items really help lower income families, which is a good thing.
How will the tax law affect my family?
The Tax Institute at H&R Block developed detailed estimates for how the new law will affect families at various income levels next year ‚Ä’ with some savings that are new, and some that continue from previous years:
- A single taxpayer making $50,000 a year who rents an apartment and pays $3,500 in college tuition and fees would save $2,280 in income taxes and $1,000 in Social Security taxes ‚Ä’¬†a total of $3,280.
- A married couple with two young children, some modest investments and combined wages of $100,000, would save $6,256 in income taxes and $2,000 in Social Security taxes ‚Ä’¬†a total of more than $8,200. Income taxes would be lower because of the lower rates, a $1,000 per child tax credit and a $1,200 tax credit for child care expenses. The couple earns $2,000 in dividends but it would be tax-free at their income level. Wealthier investors would pay a top tax rate of 15 percent on dividends. The couple would also be spared from paying the alternative minimum tax, and would pay lower Social Security payroll taxes.
- A married couple with a child in high school and another in college, combined wages of $170,000 and larger investments would save nearly $7,800 in income taxes and $3,400 in Social Security taxes ‚Ä’¬†a combined savings of nearly $11,200. Income taxes would be lower because of the lower rates and more generous deductions for state and local income taxes, property taxes, mortgage interest and charitable donations. Assuming the couple earned $4,000 in qualified dividends and $5,000 in capital gains, that income would be taxed at 15 percent, instead of the higher rates that would have taken effect without the new law. At their income level, the couple wouldn’t qualify for the child tax credit and would get only $125 from the education tax credit. However, they would save more than $3,600 because they would be largely spared from the AMT.
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Filed Under: Taxes
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor¬ģ and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.
Thank you. I needed to know how this would affect my finances. So it looks like overall I will take home a bit more money. That should do my emergency fund some good.
Good, informative post. I've been looking for a breakdown like this all over the internet, and lo and behold, find it on a bookmarked blog. Keep up the good work.