UPDATE: Bush Tax Cuts
The long and short? They are sticking around. President Obama reached a deal with the Grand Old Party, extending the tax cuts from the Bush Era another two years. He also decided to lower estate taxes. Before everyone gets all excited you should know this is only going to affect those in the $250k a year bracket; all 2% of you.
The president was kind of between a rock and a hard place. His option was to refuse to give the GOP a tax cut for the millionaires and in turn watch them refuse to do anything about helping the unemployed or give the extension and receive extended unemployment benefits for thirteen more months, a cut in payroll taxes and expansion of the earned income tax credit. If they had been allowed to expire, the middle class would be paying 2-5% more (avg. of $900 annually).
Let's venture to the economic side of the tax issue here for a second and then address the frame work. Are these cuts really going to be the economy's saving grace? Their effect will be insignificant at best. The beloved tax policy of Reagan/Bush has taken the economy from bad to worse. Nothing the guys on the hill have done will be stopping this from continue to do so. Through all this unrest the only thing that has happened is the exact thing that caused other economic issues in our history. People are scared and the rich are enabled to hoard more and more. Then the government wants to come along and take more money out of the system. Alas the proud economic base and interlaced monetary beams of a world power is eroded.
A press release from the White House sites a memo from Morgan Stanley as a reason for our Congress to pass the tax break on the wealthy. Aside from the fact that Mongan Stanley helped run our economy into the ground, they were also one of the top corp. campaign contributors to Pres. Obama. The company was also given a 2 trillion Bailout by Obama's Fed.
What does this say? The White House, the voice of the president cites a bank that we had to bail out as a objective source on the economy? And they are doing so to feed us a tax plan that gets the company's execs new tax cuts. They are either being very bold or think the we are all seriously ignorant of our countries dealings. You pick.
So What Does This Mean For You?
For now we can rest a little easier. For the next two years we won't be shelling out more than we have already towards the federal income tax. Actually, thanks to a temporary reduction of the payroll tax, Americans will see a slight increase in their paychecks come January. Those without jobs will also continue to receive aid. Unemployment "benefits" for the long-term jobless are going to be continuing on into 2011 as well.
In the long term, the country's taxpayers will be paying the price for this. We will all experience foreseeable budget cuts, higher taxes on the back end, and maybe a lower standard of living.
So here is the breakdown for the present. We will just have to embrace the "deal with tomorrow when it gets here" philosophy I guess.
Investment Income
Tax rates on long-term capital gains and qualified dividends will remain at a maximum 15% through 2012, and those in the two lowest income-tax brackets - 10% and 15% - will continue to enjoy a 0% capital-gains rate.
Paychecks
one-year reduction in the payroll tax that funds Social Security. FICA taxes will drop from 6.2% to 4.2% for most workers. The self-employed will see a decrease off 2% as well. Workers must be participants in the Social Security System to receive the payroll-tax holiday.
Deductions
In the past tax benefits were reduced as certain income levels were exceeded. Now, families in the upper-level income bracket can enjoy claiming until their hearts content. There will be a continued "no-cap" policy on exemptions and deductions.
Effective Rate Versus Tax Bracket
Many people were very concerned when the Bush tax cuts expired at the end of last year. Of course, Congress quickly passed new tax cuts for anyone who was under the threshold of $406,750 in annual earnings. Those who were above this earning level saw their marginal tax rate rise to 39.6 percent. Contrary to a common belief, this does not mean that nearly 40 percent of the earnings of those who make $406,750 per year goes to the federal government in the form of income taxes. While these people may pay between 40 and 50 percent of their income in taxes and fees at all levels, federal income taxes will not be that much.
The reason that those who make enough to make the $406,750 tax bracket do not pay 39.6 percent of their entire pay in income taxes is because of the progressive tax system that the United States currently employs. For a single person, there were six tax brackets in 2014. Married people also had six tax brackets, but married people who file jointly can have a higher income before hitting a higher bracket. The lowest tax rate was 10 percent on the first $8,700 of taxable income for single people. Those married and filing jointly would have the 10 percent bracket charged on the first $18,150 of taxable earnings for the year. Single people would have to earn over $36,900 of taxable income to jump from the 15 percent bracket to the 25 percent tax bracket.
Those who jump from one bracket to another do not pay the higher rate on all income. Rather, they only have to pay the higher tax rate on the amount of income that falls into the higher bracket. The first $9,075 of every taxpayer's income is taxed at the 10 percent rate. Someone who earned $500,000 would only pay at the 39.6 percent rate on the amount of taxable income in excess of $406,750 in 2014. The rest of his or her income would be taxed at lower rates. Additionally, there is a difference between the tax bracket a person falls within and the actual effective rate that they pay. There are numerous exemptions and deductions that a person can take to lower their tax burden.
A person can take a personal exemption for him or herself and for each person in his or her household that is a dependent. The amount of this deduction per person was $3,800 in 2012, and this amount cuts down the amount of taxable income that a person will have to pay taxes on. A single person could also deduct $5,950 from their taxable income as a standard deduction. Married people filing a joint return could double this deduction. Some people are able to use the tax code to deduct even more. A person can calculate their effective tax rate by dividing their actual tax paid by their annual income. A couple earning $50,000 in 2014 and who took the standard deduction would have had a taxable income of $30,500. This married couple would pay $3,701 in federal income tax according to the tax table. When divided into the $50,000 in actual income, this family's effective income tax rate would be just 7.4 percent of their income in spite of their having a marginal rate of 15 percent.