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2010 Bush Era Tax Cuts Extenders Bill Explained

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I held back on putting up a post about the fate of our tax brackets because of all the political tap dancing lately, with both sides complaining about the compromise, but it appears that we’ve reached a final resolution.

The timeline:

  • Monday 12/13: The Senate voted to end debate (cloture) 83-15
  • Wednesday 12/15: The Senate vote 81-19 in favor of passing Senate Amendment 4753 (which amends H.R. 4853 Middle Class Tax Relief Act of 2010)
  • Thursday 12/16: Despite all the complaints by House Democrats, the House of Representatives approved the $858 billion tax deal on a final vote of 277-148.
  • Friday 12/17: It’s expected that President Obama will sign this bill today.

If you’re one to keep track of who scored which political points, then I think each side came out with what they wanted. President Obama and Democrats received tax cuts for the middle class, extension of unemployment, and a stimulus by way of a payroll tax reduction. Republicans received tax cuts for everyone, as well as a reduction in the estate tax from what it would’ve been in 2011 given no action. Fiscal conservatives, who were all the rage in November, saw nothing.

Bush Era Tax Cuts

The Bush era tax cuts, ushered in with bills from 2001 and 2003, will be extended for two years.

In addition to extending the tax cuts, there will also be a payroll tax holiday of 2% for employees. Normally, you pay 6.2% in payroll taxes (Social Security and Medicare) on your first $106,800 of earnings. For 2011, you would only be paying 4.2%, a maximum reduct of $2,136.

Unemployment Benefits Extension

The extension of unemployment benefits died a few weeks back and rose from the ashes as part of a compromise. Originally the highest tier (extended benefits), 99 weeks, was reserved for those in states (25) with high employment (8.5%+) and the deadline was November 30th. If you want a primer, here’s a fantastic one by Ezra Klein of the Washington Post as well as a discussion of unemployment in general.

Estate Tax

The estate tax, which expired this year and was scheduled to return next year at 55% with a $1 million exemption, will return with a top rate of 35% and a $5 million exemption (remember, this doesn’t include $1 million you can give away without paying a gift tax and the $5 million is per person, so a couple can pass $10 million tax free).

There were a few smaller (i.e. less headline-worthy I suppose) tax items:

  • A patch for the Alternative Minimum Tax (AMT), increasing the limits for 2010 and 2011. It’s estimated that the patch will protect 20 million tax filers from AMT by raising the amount of income exempt from AMT. In 2010, the amount will be $47,450 for single filers, $72,450 for married filing jointly. In 2011, it would be $48,450 and $74,450.
  • Maintains the standard deduction for married couples at exactly twice that of single filers and expanded 15% tax bracket for joint filers.
  • Child Tax Credit of $1,000 extended for two years, includes a $3,000 refundability threshold.
  • Earned Income Tax Credit extended for two years.
  • American Opportunity Tax Credit extended for two years.

What do you think?

{ 44 comments, please add your thoughts now! }

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44 Responses to “2010 Bush Era Tax Cuts Extenders Bill Explained”

  1. Andrew says:

    Jim,

    To clarify, no one received a tax cut based on this bill. The current taxation levels will simply remain in place. Thus avoiding the largest tax increase in our nation’s history.

    • daenyll says:

      ah, nomenclature… to politicians it’s a tax cut, but to the real world they just didn’t let the previous cuts expire and thus “raise” taxes

    • Mike Piper says:

      Isn’t the 2% reduction in payroll tax rates a tax cut (for those making enough such that it outweighs the expiring Making Work Pay Credit)?

      • govenar says:

        Yeah, as Mike said, the payroll tax reduction will result in lower taxes for a lot of people, so there really is a tax cut here. (Though, some other things were not extended, so it’s possible that some people will see higher taxes.)

    • Gul says:

      Jim, if no one received a tax cut, then there would have been no tax increase. It would have been the resumption of Clinton era tax rates, not a tax increase. Bush cut taxes (resulting in the biggest deficit in history) early in his adminstration knowing the cuts would expire way after his departure from the White House. I remember commentators of any color at the time saying that tax cuts without cuts in spending would be mortaging our children’s future, hurt retirement accounts and weaken the economy over the long term. Are people surprised? Add two very, very expensive wars, and people wonder why we’re in financial state we’re in?

      • Jim says:

        Say what you will but taxes next year would’ve been higher than taxes this year and that, by definition, is an increase.

      • govenar says:

        In 1913, the tax rates in all brackets were 7% or less. So compared to that, taxes are increasing a huge amount next year.

      • SoonerNATX says:

        the first bush war was declared by a democrat controlled house and senate.
        the second was by a democrat controlled senate and repub controlled house.

        kind of goes along with the stimulating package, doesn’t it?

        • SoonerNATX says:

          i failed to mention that the sentate only was Dem-controlled AFTER Jeffords made his switch to independent and caucus with the Dems on June 6, 2001. Before June 6 it was 50-50.

  2. Ryan says:

    When do you think the 2011 tax brackets will be published?

  3. Pete says:

    You said both sides got some of what they wanted – and included middle class tax cuts as something the Democrats wanted. Republicans were also in favor of tax cuts for the middle class and poor as well, that wasn’t the sole domain of the Democrats. So you should add that to “things the Republicans wanted” list as well. They weren’t just out for tax cuts for the wealthy, and estate tax reductions – despite what some would have you believe. I also don’t agree that fiscal conservatives didn’t get anything as they would be in favor of tax cuts for everyone. They just would want a reduction in spending as well. I have a feeling that a reduction in spending isn’t coming anytime soon after seeing that pork-laden spending bill they tried to pass yesterday. Even in these times they’re trying to pass billions of wasteful spending – they have no shame. Sigh.

    • Seth says:

      Of course Jim is not going to explain that Republicans wanted tax cuts for everyone and he only mentions they wanted it for the rich. That is because he is a Liberal and he writes things, just like all Liberals do, trying to make Republicans and Conservatives look bad.

      • Jim says:

        I wrote it that way because that’s where the compromise was, if both sides want tax cuts for everyone earning under $250,000 then there’s no point saying they compromised by giving tax cuts to everyone earning under $250,000. Only Republicans wanted tax cuts for those above $250,000, so that’s why it was mentioned that way. There was no discussion about tax cuts for $250,000 and under because everyone agreed that was good.

        I don’t try to make Republicans/Conservatives look bad just as I don’t try to make Democrats look weak.

        • Texas Wahoo says:

          But you included tax cuts for the middle class as something that Democrats won:

          “President Obama and Democrats received tax cuts for the middle class, extension of unemployment, and a stimulus by way of a payroll tax reduction. Republicans received tax cuts for the wealthy as well as a reduction in the estate tax from what it would’ve been in 2011 given no action.”

          You could just as easily have put the “tax cuts for the middle class in the Republican category:

          “President Obama and Democrats received an extension of unemployment and a stimulus by way of a payroll tax reduction. Republicans received tax cuts for the tax cuts for the middle class and the wealthy as well as a reduction in the estate tax from what it would’ve been in 2011 given no action.”

          It way you worded it makes it sound like the Democrats were fighting for the middle class.

    • uclalien says:

      Speaking of pork…I read yesterday that the the spending bill includes a $6 billion ethanol subsidy. Honestly, I have no idea who wants this garbage passed. Even Al Gore recently referred to these subsidies as “not a good policy.” The only explanation is that the ethanol industry is lining the pockets of Washington (which isn’t all that unique). Here’s investors.com’s take:

      • $10 per extra gallon of ethanol.
      • $14 million per extra job.
      • $1.2 billion to attract one extra Senate vote.

      http://www.investors.com/NewsAndAnalysis/Article/556545/201012101857/Ethanol-Subsidies-10-A-Gallon-And-14-Million-Per-Job-Created.aspx

  4. TLV says:

    I have mixed feelings; while of course I don’t want to pay more in taxes, part of me cringes when I read a 33% decrease in the social security withholding when it’s already insolvent.

    • eric says:

      That was my first reaction too…

    • freeby50 says:

      Social Security is not insolvent. It is expected to be insolvent in around 20 years. There is a big difference between the two.

      However I agree that short funding it now isn’t going to help at all.

    • billsnider says:

      I agree. There is one side of me that does not want to see taxes rising and another that says that this adds to the deficit. So I feel that both sides acted badly.

      Bill Snider

    • saladdin says:

      As much information you have at your hands in tbis day and age and you think SS is already insolvent?

      saladdin

  5. AndrewL says:

    I agree with Pete, Republicans and Conservatives got what they wanted, No tax increases for anyone. They wanted the estate tax to remain at 2010 levels as well, so it’s actually a concession they gave to allow it to increase to 35% from… 0%.

    The Pork Laden spending bill was pulled from a vote, so there’s a victory somewhat.

  6. Demi says:

    My kids….got nothing…but to hold the bag for all this political grandstanding. I’d rather pay the bills now then down the road. My kids are the innocents, here. All of our kids are. Is this the legacy we will leave them with: our bills? I don’t mean to be a kill-joy by any means…but that is the big picture. We have college graduates coming out to little or NO jobs in their field carrying $100,000+ in college bills. These politicians that vote on this kind of thing are protected. They don’t have to rely in SS…they get automatic increases and ‘special treatment’ from their big bank contributors. Sorry. I am just worried about my future. 401K’s aren’t paying crap in interest, and my hands are tied as to how much I can invest. That makes me dependent on SS in some sorts when I retire. I don’t like someone else (irresponsible elected officials) making my financial decisions.

    • zapeta says:

      Politicians are masters of pushing the consequences of their actions down the road. I’m not sure what people taking out 100k in student loans has to do with it…nobody is making anyone take out student loans. As for the return from your 401k, if it isn’t enough consider a riskier investment with more potential for return.

      • Demi says:

        Unless by magic parents and/or their children can save enough in cash for their children to go to college after HS, then there are two traditional choices; re-mortgage the home which has lost as much as 40% of its accrued up value, or loans from a multitude of lenders. These have to be paid back. I was lucky that I walked into a very good job the day after I graduated college. Today, that is not happening. It still took me 7 years to pay off my student loans. Without a job out of college like we are seeing happen more often today, how is one to make payment on those student loans? Many times parents and even grand parents are left with loans to be paid that sponsored their children and grand children with many of those loans based on what was a paid for home. It is becoming a problem. Lack of good paying jobs attributes to that problem….is what I mean.

        I listened to our 401K adviser and moved 60% of my 401K savings into riskier investments before the great American Market Wall Street Train Robbery and for my efforts I was awarded a $90,000 loss, more than some have in their 401K to begin with. I’ve never been one to complain and moan. I just hate to see what Americans are falling for from our govt. Its like watching people…my fellow Americans…follow the pied piper to the financial sea…and jump in. I’ve learned it is not good to listen to someone who will not share in your suffering in what they as their decisions. There will be a tomorrow. Not planning for it today as is being done for us…is a mistake. All the problems that SHOULD have been solved 30-40 years ago and the same ‘push it off’ tactics were used as they are today…we are dealing with now. We are being lead astray by a govt. that is immune to the issues WE, Americans, must deal with now…AND in our futures. This govt. is basically forcing us to borrow money from banks. Or, we do without. I prefer to do without and save my money for my future.

  7. Thanks for the breakdown….. any discussion of taxes depresses me, but it’s always better to know what’s happening.

  8. Eli says:

    I’m looking forward to my next SS statement where it details how soon 1) SS will pay out more than it takes in and 2) when SS trust fund will run out. Cutting the payroll tax by 33% will definitely accelerate the demise or need for drastic action to save SS. And this whole “trust fund” is kind of a joke anyways since it’s just a big fat IOU.

    They commissioned a deficit commission to look at reducing the deficit and saving SS. Instead of following the recommendations, they CUT SS taxes and added almost 1 trillion more debt.

    The lack of forward thinking never ceases to amaze.

    • govenar says:

      Since the government seems to be moving towards providing welfare via other methods (e.g., refundable tax credits, extended unemployment), maybe that will just take the place of Social Security.

  9. Jan says:

    I resent my Social Security being called welfare. I paid in- 12 cents per dollar- every year. Now, when I am getting to the point of getting it out—opps it was spent!
    After working in schools and having poor parents have their children declared mentally handicapped or Autistic so they could get disability for the child…I have become a bit thick skinned over Social Security.
    And now we are cutting DOWN the amount being paid in? That makes sense….NOT!

    • Mike says:

      Sorry, but social security was kinda scammy to begin with. It was designed so that people who paid into it would never receive it. Unless you managed to live longer than the average life expectancy.

    • Bey says:

      What you paid in was not for you, Jan, but for others. It’s not an account for individuals, it’s a tax on individuals. To fix the system, we have to stop giving SS checks to people simply as a prize for longevity, and make sure those who really need the funds get them. I apologize in advance, Jan, if you are one of those people who are truly in need. Too many I know of are not, and would not starve or be forced out into the street if deprived of their monthly check.

  10. Josh says:

    There is a lot of talk on both sides of the aisle about whether to raise or lower taxes. But that’s only half of the equation! A financial plan accounts for “money coming in” AND “money going out”. We need to cut back on spending! Not reach in to working Americans pockets every time we’re in a pinch!

  11. Mike says:

    Lame, so unless the gov’t raises the retirement age or raises taxes. People in my age group won’t get a dime in social security. The only proposals I see are the people that have already paid into it getting the full benefits while those that can’t vote yet get the shaft. I’ll probably be dead by the time I’m able to collect social security. If the gov’t gets its way.

    • Demi says:

      As Americans our goal…if anything for our kids…should be to kick the govt back where they belong; working for the American people. Until that happens…whether it be by vote or by sword…the American people will be on the hook for the govt mistakes (or choices…how ever THEY look at it). People in your age group are the one’s that need to rectify what has been done. Otherwise…the pyramid scam called SS will be gone by the time you invest thousands under the govt mandate called…taxes.

      Madoff did it and it was called illegal. The United States Govt does it will FILL KNOWLEDGE it will fail…and it is legal?

  12. TomM says:

    My advice would be to not count on getting a dime in social security. Save your own money through an IRA, 401k or Roth IRA. Not that they’re guaranteed or anything….but we really don’t have any other options. Except for hiding it in your mattress. And it cracks me up that their are limits on how much you can save. Yet another example of how wonderfully idiotic our government is. Someone wants to save but our government wants to limit how much you can save because they might take in less tax dollars because of it.

    Until our government stops spending more than they take in nothing is going to change. And the longer we allow our idiot congressmen and congresswomen to vote on things that don’t apply to them (SS, Healthcare to mention two) the further down the tracks to debt, and socialism we’ll go.

  13. concerned says:

    You better look at the 1036 early release. It appears that individuals making less than 75,000 will actually have a tax increase over the 2010 tables whereas those over 100,000 get a tax reduction.

  14. Erik says:

    “Fiscal conservatives, who were all the rage in November, saw nothing.”

    hahaha, this line is so true. I remember the first time I heard this bill on the radio and I was like “What’s the compromise? We’re going to reduce revenue and increase expenditures, so much for balancing the budget.”

    • Jim says:

      It’s amazing how quickly that quieted down… and by that I mean there was no more coverage because it was no longer interesting.

      • Scott says:

        And you expected politicians not to be hypocritical? If they really wanted to make things better, they would not have extended anything. Give the medicine that needs to be given to make the patient better.

        • Demi says:

          That is exactly how I feel about it. Let me pay more NOW…when I can afford to. Not in 20 years when my SS return is cut year over year and I need the money then to survive. Again…govt. making decisions on programs that they do NOT plan to participate in.

  15. Adam says:

    Commenters (Commentors?) keep mentioning a 33% decrease in payroll taxes. The so called payroll tax consists of Social Security Tax and Medicare Tax. The Social Security Tax is normally 6.2% for the employee AND 6.2% for the employer. The temporary reduction is only to the employee side which means a reduction of only 16%. The medicare tax was and is remaining 1.45% for employees and 1.45% for employers.

  16. Joseph says:

    Remember Social Security was created based on the number of people paying in would be more or atleast equal to the amount being pulled out. The baby boomers have created a very top heavy population where more individuals are recieving benefits than ever before and are living longer.


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