The Bush-Era Tax Cuts Live On

With the President’s signature, most of them will remain in place through 2012.

A holiday gift for taxpayers? After a 277-148 passage in the House and an 81-19 approval in the Senate, President Obama signed the 2010 Tax Relief Act into law on December 17, extending the Bush-era tax cuts.¹ Here is the impact of the new legislation:

Current federal income tax rates are preserved for everyone. The federal income tax brackets will remain at 10%, 15%, 25%, 28%, 33% and 35% for 2011 and 2012.²

Unemployment insurance extends for 13 more months. This is retroactive, so the federal extension of long-term jobless benefits applies from December 2010 through December 2011.²

A payroll tax holiday occurs in 2011. The payroll taxes that employees pay will drop from 6.2% to 4.2% next year. (There will be no payroll tax cut for employers in 2011, only employees.) As envisioned, this will result in a savings of about $1,000 next year for a wage earner bringing home $50,000. This replaces the Making Work Pay credit.^3,4,5

Estate taxes will be milder than at any time in the past 80 years. For 2011, the federal estate tax drops to 35%. The estate tax exemption rises all the way to $5 million. President Obama had earlier characterized these parameters as too generous, but he and Congressional Democrats ultimately accepted them.²

Tax breaks for middle-class and working-class families won’t sunset. As a result of the new law, the child credit, the child and dependent-care credit, the EITC, and a $2,500 tax credit for higher education expenses will all be around in 2011.^5,6

No marriage penalty. The new law wards off the comeback of the marriage penalty so that married couples may take a more generous standard deduction.⁶

Taxes on capital gains and dividends top out at 15%. Passage of the 2010 Tax Relief Act means rates will top out at 15% through 2012.⁷

Businesses may expense 100% of their investments in 2011. In fact, qualified investments made after September 8, 2010 and before January 1, 2012 are eligible for this bonus depreciation. In addition, 50% expensing will be available for qualified property placed in service during 2012, and so-called “long-lived” property and transportation property may be eligible for 100% expensing if it goes into service prior to 2013.⁷

The tax break for IRA gifts to charity returns. The IRA charitable rollover, as it was informally called, was much beloved by non-profits and IRA owners, but it went away in 2010. In basic terms, it allowed someone 70½ or older donate up to $100,000 in IRA assets annually to one or more qualified charities. This opportunity is back for 2011 – and the especially good news is that Congress included a special rule in the new tax bill allowing IRA gifts made in January 2011 to count for 2010.⁸

An AMT patch, of course. Congress decided it might as well take care of that. It passed an AMT (Alternative Minimum Tax) fix as part of the 2010 Tax Relief Act, thereby exempting about 20 million middle-income households from a potential $3,900 average leap in federal income taxes.⁶

What’s the price tag of all this short-term tax relief? It is sizable. The federal deficit is projected to increase by about $858 billion over the next two years as a consequence.⁵

 

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of Statler Financial Services, Inc. This information should not be construed as investment, tax or legal advice. Statler Financial Services, Inc., not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Statler Financial Services, Inc., is registered as an investment adviser with the state of Florida. The presence of this Web site on the Internet shall in no direct or indirect way to be construed or interpreted to suggest Statler Financial Services, Inc. is soliciting to sell advisory services or offering to sell advisory services to residents of any other state other than the state of Florida.

Citations.

1 – edition.cnn.com/2010/POLITICS/12/17/tax.deal/ [12/17/10]

2 – online.wsj.com/article/SB10001424052748703296604576005430598327972.html [12/7/10]

3 – npr.org/2010/12/10/131969824/some-worry-payroll-tax-cut-threatens-social-security [12/10/10]

4 – businessweek.com/news/2010-12-10/u-s-tax-vote-may-be-too-late-to-cut-payroll-levy.html [12/10/10]

5 –startribune.com/politics/112046564.html? [12/16/10]

6 –businessweek.com/ap/financialnews/D9K5IEN81.htm [12/17/10]

7 –tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf [12/16/10]

8 – online.wsj.com/article/SB10001424052748703395904576025610771041244.html [12/17/10]

9 – montoyaregistry.com/Financial-Market.aspx?financial-market=roth-ira-rules-and-regulations&category=1 [12/18/10]

 

 

A Compromise

The President agrees to preserve the Bush-era tax cuts for all, surprising his party.

Many expected a deal – but not necessarily this one. Political and economic analysts widely believed that President Obama and Republican leaders would reach a compromise on the Bush-era tax cuts. Many felt a deal would be struck early in December. Yet few forecast how agreeable the President would be.

The Bush-era tax cuts would be extended for the wealthy. Under the bipartisan plan, the EGTRRA and JGTRRA tax cuts would be extended through 2012 for all taxpayers. At a White House press conference Tuesday, the President simply categorized it as “a good deal for the American people.”^1,2

In the eyes of some Democrats, it is just a sellout. Sen. Mary Landrieu (D-LA) termed the deal “unconscionable.” House Minority Leader Nancy Pelosi (D-CA) offered more or less the same view: “Republicans have held the middle class hostage for provisions that benefit only the wealthiest 3%, do not create jobs and add tens of billions of dollars to the deficit.” Rep. Jim McDermott (D-WA) referred to the compromise as “the President’s Gettysburg.” (At least he didn’t mention Waterloo.) Sen. Bernie Sanders (I-VT) called the deal “an absolute disaster and an insult to the vast majority of the American people” and said he would attempt a filibuster.^3,4

Tuesday, President Obama noted that he would fight to repeal these tax breaks in 2012, emphasizing that the preservation of the cuts will be temporary.² (Of course, the EGTRRA cuts were considered “temporary” nine years ago.)

The deal could give us the lowest estate taxes since 1931. The fine points of this bipartisan accord haven’t been hammered out yet, but here is what we know about it so far. Under the agreement,

• The 10%, 15%, 25%, 28%, 33% and 35 % marginal tax rates created by EGTRRA in 2001 would be preserved through 2012.
• A one-year, 2% cut in payroll taxes would make up for the expiration of the Making Work Pay credit. The Obama administration says this move will cost $120 billion with no impact on Social Security.
• The estate tax would be set at 35% with a $5 million exemption.
• Long-term jobless benefits would be extended through the end of 2011, at a cost of about $56 billion according to the White House.
• Businesses would be able to expense 100% of their investments in 2011 (retroactive to September 2010).
• The present R&D tax credit and other business-incentive credits would be extended through 2012.

The non-partisan Congressional Research Service figures that maintaining the Bush-era tax cuts through 2012 would cost America $314.9 billion.^1,2

Essentially, a trade was made. President Obama allowed the EGTRRA and JGTRRA cuts to live on for the wealthy in exchange for some of what he wanted – an extension of unemployment insurance and a payroll tax reduction.

Will partisan sparring stop the deal in its tracks? The accord is less acceptable to Democrats than the recent House bill introduced by Rep. Sander Levin (D-MI) and the Middle Class Tax Cut Act of 2010 introduced by Sen. Max Baucus (D-MT), which was defeated on December 5. Some Congressional Democrats are regarding the agreement the way a child regards spinach: not very palatable, but somewhat acceptable. Others are ready to fight it tooth and nail.

Or will opposition soften? At last week’s meeting of the White House deficit commission, Honeywell CEO David Cote made a striking remark on the process of compromise: “We can’t let the perfect be the enemy of the good.”

Here in December, Congress might want to abide by his advice – especially after President Obama’s remark that “a long political fight that carried over into next year might have been good politics, but it would be a bad deal for the economy and it would be a bad deal for the American people.”²

 

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of Statler Financial Services, Inc. This information should not be construed as investment, tax or legal advice. Statler Financial Services, Inc is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 – online.wsj.com/article/SB10001424052748703296604576005430598327972.html [12/7/10]

2 – bloomberg.com/news/2010-12-07/obama-says-tax-compromise-will-spare-middle-class-americans-rate-increase.html [12/7/10]

3 – seattletimes.nwsource.com/html/politicsnorthwest/2013616523_mcdermott.html [12/7/10]

4 – content.usatoday.com/communities/onpolitics/post/2010/12/obama-democrats-tax-cuts-reaction-/1 [12/7/10]

5 – http://www.montoyaregistry.com/Financial-Market.aspx?financial-market=the-balancing-act-weathering-the-burden-of-sudden-wealth&category=22 [12/7/10]