What The Tax Cut Extension Means To You

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.

Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts
Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts. Instead of paying taxes on $100,000 in income, you're only paying taxes on $12,000 for maybe a $2,000 tax bill, or 2% effective tax rate.

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42 thoughts on “What The Tax Cut Extension Means To You”

  1. Am gonna spend it on a trip to the Maldives.

    No revenue for the USA though so the multiplier effect is zero.

    Do I get a boo from you?

  2. More taxes??!! We don’t need more taxes! We need to SPEND LESS!!! Every time we give government more money they SPEND IT plus more! Make the current tax rate permanent and CUT SPENDING!

  3. Sunil from The Extra Money Blog

    will donate most of it. wife has a couple friends in need. i am all for capitalism – and as far as taxes are concerned, like any line item on a company’s financial statements, it should be reviewed / evaluated and tweaked periodically to adapt to current reality. i understand it gets people bent out of shape, but i have a big issue with static viewpoints/perspectives that don’t change with time.

    1. Good man sir! I will follow your lead as well and donate some of the savings to charities. Or maybe I’ll just focus even more on the Yakezie Scholarship initiative. Cheers

      1. Sunil from The Extra Money Blog

        I vote for the Yakezie fund. Will be setting up a recurring PayPal donation shortly as well. I think it’s a great initiative.

  4. Way to increase the deficit by $900 Billion. The day of reckoning is coming for the US and I feel sorry for the price the people will pay for the irresponsible finances….

    1. Kiss our children and give them a raise! It’s the least we can do :)

      Also, if you are worried about the deficit, feel free to send more of your income as tax revenue to the gov’t. I bet you won’t, which is why complaining about the deficit is pointless. Cheers

  5. You say “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.” This will only be true if companies invest in our country. If they invest in plant and equipment in foreigh counties it will help them and provide no jobs here. Intel just built a huge state-of-the-art plant in Vietnam. How does that provide jobs here?

  6. 5 million isn’t such a bad level. Even democrats don’t want it to be too low (certainly not 1 million!). When it gets low like that things get a lot more complicated in terms of will planning, exemptions for family businesses for people who didn’t estate plan correctly etc. It’s a whole lot of hassle and paperwork for people who really didn’t dodge a lot of taxes in life and who don’t really have the capacity for all those additional lawyer fees in life.

    The estate tax is considered a good tax (by economists) because it gets a lot of money from a few people who are too dead to enjoy it and encourages the next generation to be more productive because they have to work. If it starts hitting lower-to-middle middle class folks it loses a lot of the things that make it good, except for the they’re dead part.

    1. I agree that $1 million for the death tax is too low of a level. But, $5 million per person in today’s dollars is huge! How many of us will be able to accumulate in excess of that per person when we die? I’d say not many.

      35% tax seems way low. I agree with your last point.

      1. Family-owned and small businesses can easily exceed $5 million in today’s dollars, and be no bigger than a dry-cleaning store in a high-rent commercial district downtown. If the limmit is $1 million and a business must be sold or closed instead of continuing in order to pay the estate taxes, how do the unemployed former workers or the economy as a whole benefit? If it’s your job that goes away because estate taxes kill it, or your family farm (another area where $5 million isn’t all that hard to accumulate) that’s sold to pay estate taxes, is it worth it?

        Oh, by the way: once Helicopter Ben gets through printing money, we’ll ALL be billionaires, so a $5 million limit may be WAY too low!

        1. I guess so… but that’s $5 million a person.. so that’s $10 million per couple! Not bad!

          I doubt there are that many small business dry-cleaning stores with equity worth $5 million bucks.

          Inflation won’t be here for a while… but I am busy buying real estate as we type!

  7. Money Reasons

    If I meet my saving goals mid-year… then it’s definitely going toward a great vacation (then again, I would be going on a vacation that great next year with or without the tax extension…)

  8. I think there needs to be some discussion about long term tax rates because a two year extension does help long term financial planners.

    The people who still make out like bandits are the big company executives who take $1 a year in salary thus paying nothing in income tax but accept millions in stock options which get taxed at a much lower bracket.

    I think Congress should pass a dividend and capital gains rate for an odd number of years to take the election cycle out of the equation (i.e. 5, 7, or 9 year rate of 10% dividend and 15% capital gains.) Right now all they have done is set a major battle to be fought in the 2012 election cycle. The American people are being held hostage by politicians and that in its very definition is against the very foundation of this country.

    1. VERY well said about the lack of permanence of the tax structure! In fact, I just finished writing a 600 word post about the very issue. Perhaps I’ll publish it tomorrow or later today. Cheers.

  9. Hooray is right. The last thing we need is more taxes to worry about right now. We’ve come a long way since 2008 but I still think we have a long ways to go. I’m still happy that the downturn helped me feel so good about saving money and not wasting it on meaningless and unnecessary stuff though. And one thing I like to save on a lot is taxes! I hope they don’t change the internet tax rules for a while. I really enjoy being able to save on tax by shopping through certain sites.

  10. Who’s going to pay for the tax cuts? You will because state & local taxes will have to go up to compensate for the programs that the feds will need to cut… watch for the upcoming municipal bond crisis. Or were you counting on SS benefits in the near future?

    1. Well, sadly, it will be the other way around. The government won’t allow states to declare bankruptcy, (especially Obama’s hometown Illionois which is the worst of the worst), so we’ll see federal tax dollars continue to be funneled to states, much like we’ve already been seeing as part of the past “stimulus” packages.

      1. Yep, Illinois is totally gonna be taken care of as long as Obama is in obvious. So awesome!

        California is hurting, so we need all the bailout money from the Feds as possible so our state taxes don’t get raised! Thx everyone!

  11. I am ok with the tax cuts….for now, and I’m glad that they phased them out in 2 years. I worry about the same thing darwin does – who’s going to pay for them. While they *could* increase economic activity enough to collect the same amount of money (or more) than higher taxes would have, it’s not for certain.
    As for me, My income is far, far below the threshold, so not much was going to happen for me either way. I’ll probably use my kept earnings for debt payment, then savings.

  12. Hmmm…I am going to show my ignorance here. I have read some of the articles about the bill and I am not clear. Is the tax savings you mention from the extension of the Bush Tax Cuts, or are these savings in addition to those tax cuts?

    1. No worries. The up to $2,136 payroll tax cut of 2% is money in your pocket savings. The rest of the “savings” is actually what MORE you would have paid if the Democrats had their way.

      The millionaire in this example would have paid ~$31,000+ MORE taxes in 2011-2012. So now, it’s status quo and they get $2,136 back from the govt for payroll tax cut. Make sense?

  13. Think I am going to save more into my 401(k) so I will keep fund managers employed so they can spend more money!

    1. Booooo. Savings does nothing to stimulate the economy! You gotta spend it on a latest Macbook Pro or something!

      Donno how much more money NBN has anymore. Hopefully millions if they were smart!

      1. How about I’m saving for a downpayment for a bigger house? Don’t worry, I have spent buttloads of money during the recession. I went to Disney cuz of the great deals. I had my kitchen gutted and spent over $20K rebuilding it. Now we’re doing my mom’s bathroom over.

        At some point though, I’d like to start putting money towards my kid’s college fund which I have only scratched the surface. I almost had a heart attack when I realized it’s $50K/yyear for private uni these days.

  14. Hazaar!! I will be using the tax cut on the incoming bundle of joy (bundle of expense?.) We’re looking forward to some baby write off too, can’t wait to get some money back!
    We don’t make the 209k cut off so we’re just getting back the 2%. Still better off than 2010, can’t complain.

  15. I’ll probably save more, but when I have to make a decision about going on vacation, I’ll see more money in my bank account and will feel better about going out on the town.

    That tax cuts shouldn’t be permanent. They weren’t designed to be and not renewing shouldn’t be seen as ‘raising’ them as much as paying the government back for all they’ve given the past 10 years.

    1. You need to spend more in your 20s and help out the economy! You’ll have your 30s and older to save boku bucks, but in your 20s, the return on spending your dollar is MUCH greater since saving a lot is easier when you are older.

  16. I’ll be paying off more debt…not so great for the economy in the short term. But we’re having a baby next year so that is good for the economy right? Or at least it is for all of the baby products companies…

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