This article was last updated on December 3
[Update – No New Taxes with Tax Extensions Approved] President Obama has now signed into law a bill that covers a temporary extension of all the bush-era tax cuts. The new bill also contains extensions to some of the 2008 stimulus tax breaks, and even has some new tax cuts. With this legislation he has essentially created a new 2011 Economic Stimulus package, estimated at around $858 billion. Here’s how various key components of the “2011 economic stimulus package” legislation will affect you:
No increase in federal income taxes as current rates stay the same. The table below provides the potential 2011 tax rates and brackets, which are slated to be the same as 2010 levels. Tax bracket ranges may move slightly when the official IRS tables are published, but with low inflation the changes should be minimal. A rise in tax rates would have cut the after-tax pay by $3,000 for the average tax payer, so this provision is worth a lot given current economic conditions. However, the tax rates extension is only for 2 years, and unless the economy really tanks, don’t look for these to be extended again.
Lower social security payroll taxes = More money in your paycheck. The employee payroll tax, which funds Social Security and Medicare, would also be cut by 2% during 2011 to help spur business hiring. Unfortunately this social security benefit will be of no help to seniors who will not receive another $250 supplementary social security payment (nixed by Congress, due to low inflation) in 2010. Seniors should benefit from the unchanged tax rates, but are probably the group getting the least benefits from all the deficit adding stimulus spending.
Extension of unemployment benefits for 13 months. This will allow the long term unemployed to keep their unemployment benefits longer. Over 2 million unemployed would have lost their benefits this month if the insurance was not extended. However the maximum is still 99 weeks and the growing number of ultra-long term employed is a worrying trend for everyone.
Small business owners get capital equipment tax breaks. Under the compromise deal, business’ will get to take a full deduction for equipment purchases that currently must be deducted over time (accelerated depreciation original proposed in small business jobs bill). The proposal would accelerate $200 billion in tax savings for companies in the first year and benefit 1.5 million companies and several million individuals who run businesses.
Capital gains and dividend taxes unchanged providing a boost to equities –Long-term capital gains (on assets held at least a year) and qualified dividends will continue to be taxed at a maximum of 15%. This benefit will mean that investors can keep more of their gains and should see the stock market enjoy more gains in 2011.
Estate limit increase and lower taxes – Existing thresholds will be raised to $5 million for an individual or $10 million for a couple for both estate and gift-tax levies, with a top tax rate of 35%. These new provisions are only for 2 years and will expire at the end of 2012, meaning a lot of revised estate planning for families. Taxpayers who have already used some of their lifetime exclusion under the old rules ($1 million) will be eligible for the higher exemption limit. The annual gift limits will remain at $13,000, or $26,000 for a couple, a year for each beneficiary; this is in addition to the lifetime limits.
The extension of the tax cuts also reinstates many smaller, but still valuable, tax credit provisions that were also scheduled to expire at the end of 2010:
- The American Opportunity Credit, which allows college students and their parents to save up to $2500 on their taxes.
- Teachers Tax Credit for teachers who purchase classroom supplies using their own money. They can continue to write off eligible costs up to $250.
- Child Tax Credit of $1000 per child under 17 years-old will continue to be available to parents or legal guardians on the child.
- The already expanded Earned Income Credit, which reduces the marriage penalty and creates a “third tier” of the EITC for families with three or more children, has been extended for another 2 years.
I will continue to update this post as the legislation passes through Congress and encourage you to subscribe (free) to get the latest news.