“We had a responsibility to protect middle class families from a tax increase that would have hit their paychecks and harmed the recovery” – Treasury Secretary Timothy Geithner statement after the House passed the newest tax bill last night.
Nothing like waiting til the last minute…
Financial advisors have been preparing their clients for higher taxes as we waited for Congress to do something to stop the Bush era tax credits from expiring at the end of this year.
Given the slow recovery the economy is experiencing an increase in taxes that would have resulted had the Bush tax cuts not been extended would have been a tough blow, especially for the middle income class.
Congress finally passed a bill that would extend the Bush tax cuts, as well as introduce a few new ones. The bill, called the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 is expected to be signed by President Obama later today.
Here are some of the highlights of the new tax bill:
- The current tax rates have been extended for two years. They were scheduled to go up in 2011. The 10% bracket was going to disappear, and most of the other tax brackets were going to go up, which would have been devastating to taxpayers in this economy. Hopefully the economy will have grown and will be stable before tax rates do go up in 2013.
- The current capital gains and dividends rates have been extended through 2012. This will give many people an opportunity to sell positions that have a gain before capital gain rates go up.
- The Alternative Minimum Tax (AMT) exemption will remain at the higher levels for two more years, giving relief to middle income taxpayers who would have to pay AMT without this band-aid. I’m still looking for permanent AMT changes in the future.
- The new tax bill includes a payroll tax deduction for workers. Workers will get a 2 percentage-point break on their payroll tax for one year. Instead of paying 6.2% on wages up to $106,800, they will only have to pay 4.2% in 2011.
- Unemployment benefits will be extended for another 13 months, giving people who have been unemployed for an extended time period more time to find another job (with unemployment rates still close to 10% this was to be expected).
- The estate tax has been reinstated for 2011, but the top tax rate will be 35% and the exemption amount will be $5 million per person and $10 million per couple. Without this tax bill, the estate tax would have been reinstated at 55% with only a $1 million exemption.
These are just a few of the provisions included in the new tax bill. The response to the new tax bill has been mixed. Some economists say this bill will boost economic growth and create millions of jobs. Others are calling this bill “weak stimulus”. While I’m not sure how much this bill will boost the economy, I do believe that if the Bush tax cuts were allowed to expire the higher taxes that would have resulted would have been very difficult for taxpayers in this struggling economy.
For more information on the new tax bill and how it will affect you, please visit Tax Cut Deal: How it Affects You at CNNMoney.com.