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New Law to Cut Taxes for Most Households

But retirees won't get the Social Security tax reduction

En español | The $858 billion tax cut signed into law by President Obama last Friday extends a series of Bush-era tax cuts for two more years and creates new ones, offering at least modest financial benefits to most taxpayers and big savings to the country's wealthier citizens.

But retirees will miss out on one of the largest benefits of the package — a 2 percentage-point cut in the Social Security tax. If you don't work, you don't get that break.

A study by the nonpartisan Tax Policy Center found that roughly two-thirds of individuals or couples age 65 or older won't get a tax cut at all in 2011, largely because they don't work. The average gain for this age group will be $394, compared with $950 for all age groups.

Still, whether you're an employee on a company payroll, an investor selling appreciated stock or a long-jobless worker wanting continued unemployment benefits, you'll find something to like in the new legislation.

"Not only will middle-class Americans avoid a tax increase, but tens of millions of Americans will start the new year off right by opening their first paycheck to see that it's actually larger than the one they get right now," the president said just before signing the bill into law Friday afternoon at the White House.

The tax law will widen the national debt in 2011. But proponents say that at a time when the nation's economic recovery remains uncertain, what amounts to a national pay raise could boost spending by many billions of dollars and help move the country back toward prosperity.

Here is a summary of the key provisions of the law.

Lower taxes for workers, longer unemployment benefits

Almost every worker will benefit from the law's 2 percentage-point reduction in the tax that funds Social Security, the Federal Insurance Contributions Act (FICA) tax. For the next year, employers will withhold only 4.2 percent of your wages compared with the current 6.2 percent, a reduction of nearly a third. How much you'll save, naturally, depends on how high your wage income is, but it will total as much as $2,136 a year for people earning more than $106,800, the maximum amount currently subject to Social Security withholding.

The law also contains a two-year "patch" for the alternative minimum tax, or AMT, retroactive to January 2010. The AMT was originally set up to ensure that people with high incomes pay taxes. But it wasn't indexed for inflation, and over the years it has come to capture many middle-class taxpayers, especially in regions of the country where residential mortgages are big. The patch will spare an additional 21 million taxpayers from this tax for this year.

The law extends unemployment benefits to the jobless for up to 99 weeks. This will have special impact for older Americans seeking work, because they make up a disproportionate number of the country’s long-term unemployed. In November, jobless workers age 55 and older had on average been out of work for 44.9 weeks, compared with 32.8 weeks for younger workers, according to the Bureau of Labor Statistics.

It extends a tax credit worth up to $1,000 for each qualifying child under 17. It also continues the earned income tax credit, providing a low- to moderate-income family with three or more children an extra $600. The combined tax credits would mean $2,000 for a family with three children making $20,000.

Keeping investment taxes down

Without the new law, taxes on capital gains and dividends would have jumped significantly in January.

The new law extends for two years the current — and historically low — tax rates on long-term capital gains and dividends. The top rate for both will remain 15 percent. The rate will remain zero for couples with taxable income below $69,000 — "a very nice situation for many seniors," says Bob Williams of the Tax Policy Center, who adds that many retired people seek investment income to supplement their monthly Social Security payments.

Without agreement on the extension, the top rate on long-term gains would have gone back to 20 percent, where it was before the Bush tax cuts, while the top dividend rate could have climbed as high as 39.6 percent.

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