What The Tax Cut Extension Means To You
Hip hop hooray! With House Democrats agreeing to not hold the middle class hostage anymore, the tax bill passed 277-148! It was a landslide victory, but still it’s interesting to see that there were 148 dissenters. What’s more amazing is that Democrats weren’t able to lower the estate tax exemption amount of $5 million per individual, and raise the estate tax level of 35%. Talk about bad negotiating!
The real fun now begins where we all do rough pro forma calculations of how much more disposable income we’ll have in 2011 and potentially 2012! First off, I’m glad to see that everybody will pay 2% less on the first $106,800 they earn thanks to a cut in payroll taxes (Social Security and Medicare) from 6.2% to 4.2%.
From $100,000 to $172,000 (28% Federal marginal tax bracket for singles), you really aren’t going to see much of a change in that money earned after, because the government wasn’t going after you guys. But, for all you lucky ducks who make $172,000-$380,000 (33% Federal marginal tax bracket for singles), and $380,000+ (35% Federal marginal tax bracket for singles), you’re in for a big treat!
THE PARTY TIME FORMULA!
All you’ve got to do is take whatever income you plan to make in 2011, subtract $172,000 and multiply by 3.5% + $2,136 to get your pro forma tax savings! The 3.5% is the estimated average amount the government would have raised the top two income tax brackets by: 33% and 35% would have gone to 36% and 39.6%, respectively. The $2,136 is from payroll tax savings on the first $106,800.
Example: Let’s say you plan to make $1 million bucks in 2011. Take $1,000,000 – $172,000 = $828,000 X 0.035 = $28,980 + $2,136 = $31,116. I’ll take a guess that the millionaire will spend $10,000 on diamond earrings for the wife or a $10,000 home theater system for the husband and save the remaining $21,116. Not bad for the economy!
What about married couples? Well remember, the government is sexist and doesn’t believe 1 + 1 = 2. In other words, the tax brackets don’t double given they believe one spouse should be domesticated and not work. Hence, instead of using $172,000 in the formula, replace it with the 33% tax bracket income level for couples of $209,250, and you’re good to go! If the government wasn’t sexist, that number should be $172,000 X 2 = $342,000.
Note, If you make anywhere between $106,801 and $172,000 your disposable income only increases by $2,136. If you make under $106,800, you’ll save whatever you make X 2%. You may be more conservative and use lower than a 3.5% savings for your calculation as well. Everything is a rough estimate, since taxes are complicated. But, for the most part, follow the formula above and start partying!
OTHER HIGHLIGHTS FROM THE BILL
Extension of Unemployment Benefits: The legislation extends emergency unemployment benefits at their current level for 13 months, preventing an estimated 7 million workers from losing their benefits over the next year.
The Child Tax Credit: The $3,000 refundability threshold established in the Recovery Act for the Child Tax Credit will be extended, ensuring an ongoing tax cut to 10.5 million lower-income families with 18 million children.
The Earned Income Tax Credit: The legislation continues a Recovery Act expansion of the Earned Income Tax Credit worth, on average, $600 for families with 3 or more children, and reduces the “marriage penalty” faced by working married families.
The American Opportunity Tax Credit: A partially refundable tax credit worth up to $2,500 per student per year that helps more than 8 million students and their families afford the cost of collegewould be continued under the agreement.
100% Expensing: The agreement includes the President’s proposal to temporarily allow businesses to expense 100% of certain investments in 2011, potentially generating more than $50 billion in additional investment in 2011, which will fuel job creation.
Readers, what do you plan to do with your increased disposable income? Will you be a patriot and spend the money instead or save it for a rainy day now that you have 2 years of visibility? Many Republicans are upset because of the non-permanence of the tax cut. Do you agree? I’d love for people to blow holes in my simple Party Time Formula.
Hip Hop Hooray! by Naughty By Nature circa 1991.