Tax deal offers something for people at every tax level

Associated Press

There’s something for virtually everyone.

Political discussion about Monday’s congressional tax-cut compromise has focused on how much money the wealthy might save. Yet you’re bound to see more money in your wallet, whatever your income.

That’s because the package provides a bonus in addition to the widely anticipated extension of the Bush-era tax cuts.

The suprise perk is a one-year reduction in Social Security payroll taxes.

Nearly every worker will take home more money starting in January. The deal also includes an extension of unemployment benefits through the end of 2011.

“If this package does indeed pass, it’s going to make a significant difference over the coming year for middle-class taxpayers,” said Melissa Labant, a tax manager for the American Institute of Certified Public Accountants.

Economists expect the combination of maintaining current tax rates, reducing payroll taxes and boosting other tax benefits will induce consumers to spend more and investors to turn more bullish.

Here’s a look at key elements of the compromise package.

PAYROLL TAX

The government takes 6.2 percent out of your paycheck, up to $106,800, for Social Security. That would drop to 4.2 percent in 2011, resulting in an immediate increase in take-home pay.

If you make $50,000 a year, you will pay $1,000 less.

If you get paid twice a month, you will have an extra $41.67 in your paycheck starting in January.

Anyone who makes more than $106,800 a year will receive the maximum savings of $2,136.

ESTATE TAX

For the past 12 months, you didn’t pay any taxes if a family member died. In 2011 the estate tax was supposed to be 55 percent of the value of an estate after the first $1 million. Now it will be 35 percent of an estate’s value after the first $5 million.

Except for the temporary repeal of the estate tax this year, the rate has not been less than 45 percent since 1931.

Only about 4,000 to 5,000 estates likely will owe the estate tax under the plan, based on last year’s tax filings.

TUITION TAX CREDIT

Families with kids in college can benefit from a tax credit for tuition and fees. A maximum of $2,500 will remain in place for two years. A credit reduces taxes owed, versus a deduction, which reduces taxable income.

Parents familiar with 529 college-savings plans may question what to prioritize. A 529 account encourages savings by enabling account holders to make tax-free withdrawals for eligible college expenses.

CHILD TAX CREDIT

There’s more good news if you’re a parent: The $1,000 child tax credit is being extended for two years. Taxpayers with income of less than $75,000 — or $110,000 for married couples filing jointly — qualify for the full amount.

ALTERNATIVE MINIMUM TAX

More than 21 million taxpayers will win a reprieve from the Alternative Minimum Tax for both 2010 and 2011.

The AMT was enacted in 1969 to make sure wealthy people couldn’t avoid taxes altogether, but it wasn’t indexed for inflation.

This means Congress has to raise the amount of income exempt from the AMT each year to spare millions from tax increases averaging about $3,900.

Had no adjustment been made, taxes would have gone up for individuals making as little as $33,750, and married couples making $45,000.

CAPITAL GAINS AND DIVIDENDS

Current tax rates on long-term capital gains will remain in place for two years. The tax applies to profits from the sale of an asset, such as stock held more than a year. The highest rate of 15 percent was expected to rise to 20 percent next year.

Investors also will benefit from an extension of the historically low tax rates on dividend income, which top out at 15 percent. Had no action been taken, dividend payments would be taxed as regular income.

UNEMPLOYMENT BENEFITS

Millions of job seekers will benefit from an extension of their benefits at current levels through the end of 2011. The extension applies to workers laid off for more than six months and less than 99 weeks.

Seven million Americans would have lost their benefits through next year without the 13-month extension. Obama’s Council of Economic Advisers estimates the provision will create 600,000 jobs next year.

That’s because the unemployed live on the edge, and tend to spend every dollar they get, rather than save. That spending flows to businesses, putting them in better position to hire.