So, Congress has passed the tax deal and Obama has signed it. In case you weren’t paying attention to all the whining and cajoling that’s been going on for the last month, here’s what you need to do know about the “tax cut” as it’s being called.
Your Tax Bracket Won’t Change
The Bush-era tax cuts have been extended for another two years, which means your tax bracket won’t change, regardless of your income. Of course, if you receive a raise that pushes you into a new tax bracket, that will still happen. However, you don’t need to adjust your withholding or massively adjust your budget if you haven’t received a year-end raise.
Your Social Security Taxes Will Go Down
This is actually a significant change that could put real money back in your pocket. The current social security tax of 6.2% (the employee’s share) has been reduced by 2%. If you earn less than $106,000, you can expect to get an extra $20 per $1000 salary. So, if you make $50,000, you should receive $1,000 over the course of the year, or about $41 per paycheck if you get paid twice a month. You may not see the change in your first paycheck because it usually takes employers a few weeks to implement payroll changes, but it must all be straightened out by the end of the first quarter of 2011. The Making Work Pay credit is going away, however, so your total pay increase for the year will be $600 more than last year, or roughly $25 per pay period.
If your individual salary is more than $106,000, then you’ll receive an extra $2120 this year. Once you exceed that level, social security taxes will stop being withheld as usual. You’ll receive the full increase over last year because you didn’t qualify for the Making Work Pay credit.
If you earn less than $20,000 (or $40,000 for a family), then you will actually receive less money this year. That’s because the Making Work Pay credit is going away, and it was worth more to you than the social security tax reduction.
Unemployment Insurance Will Continue
If you’re unemployed and have not yet received a full 99 weeks of benefits (or reached the cap for your state if it’s lower than 99 weeks), then the tax deal extends your eligibility for another year. However, if you’ve reached the 99 week cap, you will not qualify for additional benefits.
The Estate Tax Is Reinstated
2010 was unique in that there was no estate tax, even for the very, very wealthy like George Steinbrenner. Starting in 2011, the estate tax will be reinstated at 35% for estates valued at more than $10 million. If the tax deal hadn’t been negotiated, the tax rate would have been 55% of estates valued at more than $1 million. While the lower rate would have significantly impacted many families, it’s estimated that the new limit will result in taxes for just 6,600 families. If you’re among those 6,600, speak to your financial advisor about strategies to
reduce your estate over time. Having a trust will not shield those assets from the estate tax. It will shield them from the probate process, which can be costly and time-consuming.
For most people, the new deal will result in more money in your pocket, and more money for your heirs when you die. However, this deal is only good for two years, so you can expect more wrangling in 2012. If Congress holds true to form, they won’t do a thing until after the election. It’s just too juicy a campaign issue, so you may want to make plans to avoid your televisions for most of 2012.