The good news is that tax rates across the board will not increase as Congress passed a bill late last night to extend the bush tax cuts.  This was a big surprise and shift in the Obama Administration’s prior policy to raise taxes for the very wealthy.  Instead, most Americans (including the rich) will benefit from the extended tax cuts.  The big ticket items cover the marginal income tax, the capital gains & dividend tax, the social security payroll tax, estate tax, and AMT exemption.  Let’s review the numbers in more detail.

No Change to Marginal, Capital Gains & Dividends
That’s right folks.  The marginal tax rates will not be going up 5% for those in the 30% plus marginal tax bracket as originally expected.  In addition, the 15% long-term capital gains and dividend tax rates will also remain in effect for 2011.

Social Security Payroll Tax Cut
This is a new tax benefit for 2011.  All employees will benefit from a 33% reduction in their social security payroll tax or a cut of 2% from 6.2% to 4.2%.  This means that someone earning $50,000, will have $1,000 (2%*$50,000) in additional annual disposable income.  That’s a nice perk.  Employers please note that your portion of the social security payroll tax of 6.2% remains the same.

It is important for employees to review their first paycheck in 2011, to ensure that their employer has only taken out 4.2% of their gross income for that pay period and not 6.2%.  Employees may have to calculate the percentage by dividing the social security amount by the total gross income for the pay period.

The Estate Tax is Reinstated But Below Prior “No Estate Levels”
In case you forgot, for 2010 Congress fell asleep at the wheel and forgot to reinstate the estate tax.  Essentially, someone could pass away and their heirs wouldn’t have to pay any estate tax.  For 2011, the estate tax is back but much more taxpayer friendly than the 2009 $3.5 million estate tax exclusion and 45% tax rate above the excluded amount.  Specifically, for 2011, the estate tax will allow the first $10 million of a couple’s estate to pass to their heirs without taxation.  Any amount above the $10 million exclusion amount will be subject to a 35% tax rate.

The AMT Exemption Amounts Rise
For 2010, the AMT exemption amounts will be $47,450 for singles and $72,450 for couples.  For 2011, the amounts will be $48,450 and $74,450, respectively.

Making Work Pay Credit Expires
This tax credit was part of the 2009 American Recovery Act and will not be renewed.  The tax credit was as much as $400 for individuals earning $75,000 or less and $800 for couples earning $150,000 or less.  The social security 2% tax cut covers this loss but only for those that are employed.

A Few Other Tax Benefits Extended

• Increased Standard Deduction – For married taxpayers filing jointly, scheduled to expire after 2010, will continue for two years.
• Child Tax Credit – The $1,000 credit amount will continue for two years, instead of reverting to $500.
• Child and Dependent Care Credit – The $3,000 credit scheduled to revert to $2,400 after 2010, will continue for two years.
• The American Opportunity Tax Credit – The $2,500 tax credit for college tuition expenses will continue for two years
• Energy & Business Credits & Deductions – There are several energy and business specific tax credits and deductions (Section 179) that will be extended.

More Tax Questions?

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