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.
You will now be able to make tax-free distributions of up to $100,000 of IRA assets to charities per year. On your tax return, you'll be able to treat donations made in January 2011 as if they were made in 2010. By giving IRA assets to charity, taxpayers don't have to claim the distributions as income, so they avoid being disqualified for other tax breaks and deductions.
Education credits and breaks will also be extended. Families of college students will be able to claim a deduction of up to $4,000 for qualified education expenses through 2011. The American Opportunity Tax Credit, which allows taxpayers to claim an education credit of up to $2,500, will be extended through 2012. Taxpayers can use only one — and both have specific income requirements.
Estate taxes rise, but not as much as they might have
Under Bush-era legislation, the federal estate tax was lowered for several years until it reached zero in 2010. Without the new law, it would have gone back to 55 percent in 2011. Instead, it will be 35 percent, with an exemption of $5 million for individuals. The new law also allows executors of 2010 estates to elect whether to use 2010 or 2011 rules — not everyone would automatically choose the zero rate of 2010 because it was accompanied by a rise in capital gains taxes on inherited securities.
This new provision, complicated as it may sound, will reduce by at least a third the number of estates subject to the tax, which was paid by only about 5,500 estates in 2009, according to Tax Policy Center estimates. The exemption was $3.5 million in that year.
In addition, the law will for the first time unify estate, gift and generation-skipping taxes so that a single $5 million exemption per individual will apply to all three.
Benefits for business
The final legislation extends for two years a federal tax credit on research and development and a separate measure allowing businesses to write off equipment expenses. Proponents say companies given incentives to buy new equipment are more likely to hire new workers to use them.
Among the other benefits extended through 2011 are deductions for expenses run up by teachers and for state sales taxes in lieu of state income taxes. Not renewed, however, was a property tax deduction for people who didn't itemize their deductions.
A range in winnings
Democrats tried to limit tax breaks for taxpayers making in excess of $250,000, but in the political compromise that brought Republican legislators into the fold, tax breaks were extended for everyone. Under the new tax tables, there will be a wide range of gains depending on income.
While the average American tax return will have a savings of $950, the figure will be $226 for those with less than $10,000 of income and $9,192 for those making more than $1 million.
Michael Zielenziger writes on business and the economy. He lives in the San Francisco Bay area.