A tax cut extension was made back in 2010 to help Americans save more money. In 2021, taxes are likely going up to pay for all the deficit spending to counteract the coronavirus.

Tax Cut Extension Celebration

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!

Time To Make More Money And Party

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!

Thankfully, the marriage penalty tax has all been abolished for 2021+.

More Highlights From The Bill With Tax Cut Extension

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.

Tax Savings Recommendation

Start A Business: A business is one of the best ways to shield your income from more taxes. You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C).

Every business person can start a Self-Employed 401k where you can contribute up to $54,000 ($18,000 from you and ~20% of operating profits). All your business-related expenses are tax deductible as well. Simply launch your own website like this one in under 30 minutes to legitimize your business. Here’s my step-by-step guide to starting your own website.