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.
Looking for suggestions on what to do with the extra cash? Open up and contribute to a Roth IRA (I recommend TradeKing) or make the maximum 401K contribution this year with the additional savings.
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?
I am G.E. Miller, & 
Not going to save me much but will offset my insurance increase. We still are in a pay freeze and have insurance going up yet again.
@ G.E. Miller
“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.”
This is not true, the cut is a 32% cut in payroll taxes and not 47%. However, when the cuts expire, the resulting ‘increase’ will be a 47% increase.
Further, the payroll taxes that you save are now part of your taxable income, so your Federal Taxes and State taxes will increase, however, your total tax outgoes will be smaller with the same income.
If you make $100,000 gross for the year 2011, as a single person for tax purposes with the standard deduction and one exemption, your taxes before cuts would be
SS – $6,200
Medicare – $1,450
Standard Deduction – $5,800
One Personal Exemption – $3,750
Taxable income – $82,800
Federal Taxes – $850+$3,900+$12,075 = $16,825
Take Home Income – $75,525
After the tax cuts
SS – $4,200
Medicare – $1,450
Standard Deduction – $5,800
One Personal Exemption – $3,750
Taxable Income – $84,800
Federal Taxes – $850+$3,900+$12,275+$336 = $17,361
Take Home Income – $76,989
The additional take home income is thus, $1,464. If you consider SS/Medicare as taxes, which they clearly are not, your total ‘tax’ burden is reduced by $1,464 from $24,475. A reduction of ~6%.
This is actually bad news for all, because it means that SS loses more of its income (which most of you will use in retirement, contrary to what anyone tells you) and your present taxes go up by $536 to bankrupt Social Security sooner. All this assuming you make $100,000 with one standard deduction and one personal exemption.
I took the opportunity to increase my 401k contribution by 2% this year. I’m still trying to get to that magic 15%. I suppose if I do well enough saving for myself I don’t have to stress about what Social Security is going to do. However, it does seem like a step backwards in fixing the system. What were they thinking?