Obama Tax Cut Extensions & New Payroll Tax Cuts: How Much will you Save?
Forget what the recent Obama tax cut deal with Republicans (aka the Tax Relief, Unemployment Insurance Authorization, & Job Creation Act) means for the country (more debt, naturally), lets focus on what it means for the average U.S. citizen – more of your earned income staying with you. Namely a 2% payroll tax holiday for everyone and an extension of Bush era capital gains tax cuts. Here are the details on each and what they might mean for you.
Payroll Tax Cut Holiday
Under this inclusion of the bill, which was passed and signed into law on December 17, everyone will see their payroll tax, or FICA portion, of their paycheck withholding tax cut by 47% from 6.2% to 4.2% of their total paycheck for the 2011 year. Many media outlets and personal finance blogs are incorrectly stating this as a ’2% cut on the FICA portion’, which is technically wrong. It’s a 2% cut on your gross before tax income.
The FICA portion of your paycheck is capped at a taxable income level of $106,800, which means that the largest tax cut you would receive would be $2,136 if your gross income (before tax salary) met or exceeded $106,800. If you make $50,000 a year before taxes, your cut would be $1,000. A married couple who each earned $106,800 or more would max out at $4,272 in savings. To find out how much you’ll be saving, simply multiply your gross income by .02.
For many people, this will be a much bigger tax cut than the previous Obama tax cut, which capped out at $400 for singles and $800 for married couples for the year. It’s not an extension of payroll tax cuts, but could be a rather large increase for many and a decrease for some of the lowest wage earners – those making $20,000 or less.
When will the Payroll Tax Cut Take Effect?
Employers will take care of the paperwork and the cut will automatically be reflected on income earned starting in 2011 (which might not be your first paycheck of the year). Employees should not need to change their withholding tax allowances, unless they’d like to do so for another reason.
Capital Gains Tax Cuts
Perhaps overshadowed in the end by the addition of payroll tax cuts, the bill also established permanent income tax rate reductions for individual taxpayers whose adjusted gross income is $200,000 or less ($250,000 for married couples filing joint tax returns), including:
- A permanent exemption from limitations on itemized deductions and personal exemptions.
- A permanent 15% tax rate on capital gains and dividend income.
- A permanent increase in the refundable portion of the child tax credit.
Those in the 10% and 15% tax brackets will continue to not pay capital gains taxes for 2011 and 2012.
The most controversial portion of the final deal, which received all the press in the months prior, was the two-year extension of the 15% capital gains tax rate for individuals in the highest tax bracket. They will continue to be capped at a 15% tax rate on capital gains and dividends earnings, while many were calling for these tax cuts to end.
Obama Tax Cuts Discussion:
- What is your take on the tax cuts?
- Do you agree with the capital gains tax cut extension for those earning over $250,000?
- How much do you stand to save in 2011?