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Extend the Federal Tax Cuts or Let Them Expire: The Impact on Your Taxes

Most people feel the tax crunch around April 15. For Congress, it’s already here.

The lame-duck session has to address a host of tax reduction provisions enacted in 2001 and 2003 during the first term of President George W. Bush, and due to expire on Dec. 31. At issue is who will keep which tax cuts and for how long?

Failure to act would bring on a New Year’s hangover for nearly three-quarters of U.S. taxpayers. The provisions govern not only the rates at which earned income is taxed, but several other key measures that were intended to lighten the load on individual taxpayers.

Republicans want to make the tax cuts permanent for all taxpayers. In his 2011 budget proposal released last February, President Obama called for making the tax cuts permanent for all except high-income households, though more recently he signaled a possible willingness to compromise during the lame-duck session, when the Democrats still control both chambers.

Here's what's at stake and proposals on the table:


2001/2003 Tax Cuts

·         Replaced five income tax brackets ranging from 15 percent to 39.6 percent, with six lower-ranging brackets of 10 percent to 35 percent.

·         Doubled the child tax credit from $500 to $1,000, raised the standard deduction for married couples.

·         Protected many middle-income taxpayers from being hit with the alternative minimum tax. The AMT was originally intended to stop high-income taxpayers from paying little or nothing, but was threatening those of more modest means due to inflation.

·         In 2003, expedited the effective date of many of the provisions passed two years earlier, while lowering tax rates on dividends and capital gains to 15 percent — with an eventual rate of zero on the latter for low-income taxpayers.

GOP Proposal

·         Keep the 2001/2003 tax cuts by repealing the 2010 expiration date permanently.

President Obama’s 2011 Budget Proposal

·         Extend the 2001 and 2003 tax cuts unveiled in his fiscal year 2011 budget blueprint for lower- and middle-income taxpayers.

·         End tax cuts for individuals earning more than $200,000 per year and couples earning more than $250,000.

·         Raise to 20 percent the taxation rate on dividends and capital gains

Sen. Mitch McConnell, R-Ky., Proposal

Extend the maximum 15 percent taxation rate on dividends and capital gains for all income levels.

White House Decoupling Proposal

·         Extend cuts long term for all except those in the $200,000/$250,000 category, which would get one- or two-year extension.

·         Reconsider reductions for the wealthiest Americans separately from other income classes, making it easier – from a political standpoint – not to extend them. Already running into resistance from leading Republicans.

Impact

* Bottom 20 percent of earners. Relatively minimal affect, according to the nonpartisan Tax Policy Center. Compared to expiration of the cuts, they would save an annual average of $66 under the full extension backed by the Republicans and $69 under the Obama plan. This is in large part due to other tax breaks already aimed at aiding lower-income Americans.

* Middle 60 percent of taxpayers. More substantial savings. Those making up to $37,500 stand to gain $575 under the GOP plan and $583 under the Obama plan; for those taking in up to $65,700, the comparable savings are $958 and $1,016, respectively; and for those making up to $111,700, the average savings are $2,005 and $2,124.

* Couples over 65 in middle-income range (slightly over $52,600). Would pay $599 in taxes under both the GOP and Obama plan. If the cuts expired, they’d be on the hook for $1,451, an increase of $852 annually.

*Top Tier of Taxpayers. Everybody saves. It gets complicated as incomes escalate, and the range of possible savings widens. The bottom end of high-income earners ($111,700 to $161,800) would save up to $3,795 under the Republican plan, and $4,032 under the Obama’s proposal. The high end ($2.727 million and up) would save on average $61,510 under Obama's plan and a whopping $371,105 under the Republican plan.

* Couples over 65 in higher-income range (about $120,800). Would pay $14,549 under the GOP plan – about $5,000 less than the $19,567 they would pay if the cuts expired. They would actually pay even less, $12,659, under the Obama plan — due to some changes in income tax brackets designed to insulate those under the $200,000/$250,000 threshold.

The median, or average income for individuals ages 50 to 54 is $84,257, according to U.S. Census data. For those age 55-59, average income is $80,458 and $71,603 for those age 60-64. The average income for those over 65 drops precipitously — $40,296 in the 65-69 category, $31,654 in the 70-74 range, and $23,230 for those over 75.

To see how you would fare under the various tax cut proposals, visit the Tax Policy Center tax calculator.

 

 

 

 

 

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