Tax Cuts Extended for Two Years

Last month I briefly talked about how the Bush Tax Cuts May Affect You if Congress did not vote to extend the tax cuts voted on by the previous administration.  I am happy to announce that on Friday, December 17, 2010, the cuts were extended for another two years.  If the cuts hadn’t been extended many of us would have seen higher taxes beginning next year.  As an example, single tax filers would have seen an increase in taxes between $400 – $1,600.  Many middle income families would have seen an increase between $2,200 – $5,500.

One of the major elements of the tax package is a one-year reduction in the payroll tax that funds Social Security.  FICA taxes will drop from 6.2% to 4.2% for most workers – This would save a married couple earning $75,000 per year $1,500 in 2011.  Keep in mind this is only for people who pay into Social Security – so unfortunately (depending upon how you look at it), teachers and other public employees who do not pay into Social Security will not see this reduction in their pension contributions.

Other key points in the tax extension:

  • 15% – Maximum tax rates on long-term capital gains and qualified dividends.

  • 0% – Tax rates on long-term capital gains and qualified dividends for those in the two lowest income-tax brackets — 10% and 15%.

  • American Opportunity Tax Credit – the new college tuition tax credit was set to expire at the end of 2010.  It has been extended through 2012.

Some other popular tax breaks that had expired at the end of 2009 have been reinstated for 2010 and 2011.  They include:

  • Choice between deducting state sales taxes or state income taxes

  • Tax deduction of up to $4,000 for college tuition costs available to some taxpayers whose
    incomes are too high to qualify for the American Opportunity Credit

  • $250 tax deduction that teachers can claim for out-of-pocket expenses for
    classroom supplies – even if they don’t itemize their deductions.

Please keep in mind that all the information I post on this site is for general purposes only.  I understand that every person’s situation is unique and should be treated as such.  If you would like more information about how something listed in any of my posts specifically affects you, please feel free to comment below, email me, or call me anytime.