Sunday, December 12, 2010

Bush tax cuts - What do they mean to you?

Hey, I am definitely not a news junkie, but these days the news started intriguing me, I think it is a sign of aging. Previously, I would be interested in anything but news, and now even though I can’t say that I am completely contrary, news do started interesting me. 

Along with my aged interest, now a days there’s lot of interesting political stuff going on, that getting me hooked. The politics and politicians can always create havoc on anything or nothing. But lately there is one thing that could have direct impact on you and me, i.e. Bush Tax Cuts. There is this great hoopla and big drama going on about this, whenever I turn on the TV lately.

Then I started to know more about this, and how this would matter to me. As most of you would know that the Bush Tax cuts would expire on December-31st and coming Jan-1st we would go back to Clinton Tax rates that were set prior 2003 and 2001. With the republican sweep in the midterm elections, things aren't going that smooth with democrats, whether it is totally a bad or good thing that's another debate. Due to midterm election defeat, now the ruling government is succumbing to the opposition party’s every need. Democrats wanted to extend the tax cuts to only people who individually earn less than 200,000$ or family less than 250,000$, but where as Republicans wanted to extend these tax cuts across the board for all the Americans. Republicans have a notion that rising taxes on the wealthy people, would hurt creating new employment in the private sector, and would push the economy in to the double dip recession.

The president had to give in to this, as republicans weren’t just ready to extend the taxes to the middle class, as they say, it’s all or nothing. Even though the President is in agreement, the bill still has to pass through the congress and has to get the approval in both the senate and House, after which the president makes the signature before it becomes the law. As of today the democrats still hold the majority in both houses of congress, but the scenario will change coming next January, where democrats loose House to Republicans while retaining slight majority in Senate. The Senate agreed with the president and passed the bill to House, where the unexpected twist happened. The House (where currently democrats hold majority) is saying, until the bill is presented with changes they won’t allow it, but republicans are not very keen on any changes.

So, now there is this BIG drama happening in the capitol hill, that the whole economy and stock market is eagerly watching to see what’s going to happen. The stock market kinda booked some profits when both President and Senate agreed to pass the bill last week, but now those profits seem to be in danger as there is a chance that the house might fail to response within deadline leading to the expiry of bush tax cuts.

Assuming this happens, here’s how it affects middle class men like me:

As of today, the Taxpayers now find their income might fall into one of six tax rate brackets, starting at 10% and topping out at 35%. Middle class men like me fall around 15-20%. If the tax cuts expire, on the first day of next year, there will be only five income tax rates: 15, 28, 31, 36 and 39.6%. Today's lowest tax rate of 10% will be gone, meaning taxes at 15 percent will be assessed on up to at least $34,000 in income for single filers.

To put more in numbers, for a typical single filer with adjusted gross income of around $40,000, the increase might be about $400 a year. At $80,000, that rises to about $1,600. How about married couples filing jointly? They'd get hit with both higher tax rates and a lower standard deduction. A couple earning $80,000 a year in adjusted gross income might pay about $2,200 extra. A married couple on $160,000 a year, Maybe $5,500 extra. 

Also for people in stock market, this is not good news, Investment income also will be taxed at higher rates. Most taxpayers now pay maximum long-term capital gain and qualified dividend rates of 15%. But in 2011, capital gains tax rates are scheduled to go up to 20%. There goes whatever the little profit you might have made in this turbulent economy.

So here are some tips to make the best out of this:

  1. Sell the stock that has appreciated nicely in 2010, so you can take advantage of the lower capital gains rate
  2. Hold on to possible capital losses. These will be more valuable in future years when the capital gains and ordinary income tax rates are higher.
    • You can use those losses to offset gains, and when you have more losses than gains, you can use up to $3,000 in excess losses to reduce your regular taxable income
  3. Enroll in to a Roth IRA. While traditional IRA distributions will be taxed at ordinary income tax rates, money taken out of a qualified Roth IRA is tax-free.
  4. From next year, the marriage couple filing joint returns would pay more taxes than the amount they pay filing individually. Bush tax cuts gave joint filers a standard deduction twice that of a single taxpayer. Also, the 15% tax bracket for couples was made twice that of a single filer. So you might want to speed up your wedding ceremony. Your filing status is determined by your marital status at the end of a tax year. If you were single for 364 days, but wed Dec. 31, the IRS considers you married for the full year. You can file jointly and take the benefit of bush tax cuts before they expire. 
Good luck saving money...


  1. Thats a touchy subject you have taken on. I guess we dont stand to lose much with the passing of this bill (last week).

  2. Yeah you are right. I am relieved for now that we wont be paying extra money towards taxes, at least for a while.