One of the most talked about discussions in the weeks before and after the elections are whether the Bush Tax Cuts should be extended for all individuals or extended for only those individuals who earn less than $250,000 a year. Looking at the economy and the millions of people who are out of work, I thought it might be beneficial to examine what were the Bush Tax Cuts since politicians and the news only provide soundbites and no real detail.
The Bush Tax Cuts were part of the Economic Growth Reconciliation Act in 2001 and the Jobs Growth and Reconciliation Tax Relief Act in 2003. HEre nis a statement from the administration in 2003 on passing the tax cuts "we need tax relief totaling at least $550 billion to make sure our economy grows, and American workers and American businesses need every bit of that relief now so that people who want to find a job can find one." Doesn't this statement sound familiar. Hmm.
New Tax Rates
The first set of tax cuts in 2001 essentially lowered the tax rates for individuals, and created a new 10% bracket.
the 15% bracket's lower threshold was indexed to the new 10% bracket
the 28% bracket would be lowered to 25%.
the 31% bracket would be lowered to 28%.
the 36% bracket would be lowered to 33%.
the 39.6% bracket would be lowered to 35%.
Marriage Penalty Relief
The Bush tax cuts in many cases lowered the taxes on married couples filing jointly by increasing the standard deduction for married filing joint (MFJ) filers to between 174% and 200% of the deduction for single filers. The effect of this change was to give the married filing joint filer a standard deduction of twice that of a single filer. The tax rates were also adjusted to remove the penalty. These changes are in effect until December 31, 2010.
Itemized Deduction Phaseout Repeal
Prior to the Bush tax cuts, taxpayers with adjusted gross income in excess of a threshold ($132,950 for 2001, $66,475 if MFS) had to reduce their otherwise allowable itemized deductions by three percent of the excess, limited to 80% of the itemized deductions subject to disallowance. If no extension is passed, then the phase out will resume at incomes above $122,500.
Personal Exemption phaseout
Prior to the Bush Tax cuts, personal exemptions were phased out by two percent by which adjusted gross income (AGI) exceeds a threshold. In 2001, a couple MFJ begins to lose the benefit of personal exemptions at $199,450 of AGI ($132,950 single, $166,200 HOH, $99,725 MFS). The benefit of exemptions is totally lost at $321,950 if MFJ.
Child Tax Credit
One major provision that will expire at the end of 2010 is the child tax credit, which doubled from $500 to $1,000 per child. Unless Congress votes to extend the child tax credit, the maximum amount will revert back to $500 for tax year 2011, and the number of families eligible for that amount will be much less as tougher eligibility standards that existed prior to 2001 will go back into effect.
Families with more than two children are allowed an additional refundable credit to the extent the excess of their Social Security tax over their earned income credit is greater than the otherwise allowable refundable credit. Further, the refundable credit will no longer be reduced by AMT. Lastly, the refundable child credit will no longer be deemed income or support for purposes of computing welfare benefits financed with Federal funds. Beginning in 2002, the full child credit will be allowable against both regular tax and AMT.
Capital Gains/Qualified Dividends
The maximum tax rate on long-term capital gains and qualified dividends were also reduced to 15%, with lower income filers facing a 0% tax rate. The sunset provisions would move the capital gains rate back to a maximum of 20%, and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%Taxes on capital gains and dividends will increase, potentially costing investors an estimated $35 billion annually.
Adoption Tax Cedit
The adoption tax credit, currently $5,000 per child ($6,000 for special-needs children) was made permanent and increased to $10,000 for tax years beginning after 2001; it can be used to offset Alternative Mininum Taxes (AMT). For the adoption of a special-needs child after 2001, the $10,000 credit is allowable regardless of whether the taxpayer incurs any adoption-related expenses.
The Bush Tax Cuts were part of the Economic Growth Reconciliation Act in 2001 and the Jobs Growth and Reconciliation Tax Relief Act in 2003. HEre nis a statement from the administration in 2003 on passing the tax cuts "we need tax relief totaling at least $550 billion to make sure our economy grows, and American workers and American businesses need every bit of that relief now so that people who want to find a job can find one." Doesn't this statement sound familiar. Hmm.
New Tax Rates
The first set of tax cuts in 2001 essentially lowered the tax rates for individuals, and created a new 10% bracket.
the 15% bracket's lower threshold was indexed to the new 10% bracket
the 28% bracket would be lowered to 25%.
the 31% bracket would be lowered to 28%.
the 36% bracket would be lowered to 33%.
the 39.6% bracket would be lowered to 35%.
Marriage Penalty Relief
The Bush tax cuts in many cases lowered the taxes on married couples filing jointly by increasing the standard deduction for married filing joint (MFJ) filers to between 174% and 200% of the deduction for single filers. The effect of this change was to give the married filing joint filer a standard deduction of twice that of a single filer. The tax rates were also adjusted to remove the penalty. These changes are in effect until December 31, 2010.
Itemized Deduction Phaseout Repeal
Prior to the Bush tax cuts, taxpayers with adjusted gross income in excess of a threshold ($132,950 for 2001, $66,475 if MFS) had to reduce their otherwise allowable itemized deductions by three percent of the excess, limited to 80% of the itemized deductions subject to disallowance. If no extension is passed, then the phase out will resume at incomes above $122,500.
Personal Exemption phaseout
Prior to the Bush Tax cuts, personal exemptions were phased out by two percent by which adjusted gross income (AGI) exceeds a threshold. In 2001, a couple MFJ begins to lose the benefit of personal exemptions at $199,450 of AGI ($132,950 single, $166,200 HOH, $99,725 MFS). The benefit of exemptions is totally lost at $321,950 if MFJ.
Child Tax Credit
One major provision that will expire at the end of 2010 is the child tax credit, which doubled from $500 to $1,000 per child. Unless Congress votes to extend the child tax credit, the maximum amount will revert back to $500 for tax year 2011, and the number of families eligible for that amount will be much less as tougher eligibility standards that existed prior to 2001 will go back into effect.
Families with more than two children are allowed an additional refundable credit to the extent the excess of their Social Security tax over their earned income credit is greater than the otherwise allowable refundable credit. Further, the refundable credit will no longer be reduced by AMT. Lastly, the refundable child credit will no longer be deemed income or support for purposes of computing welfare benefits financed with Federal funds. Beginning in 2002, the full child credit will be allowable against both regular tax and AMT.
Capital Gains/Qualified Dividends
The maximum tax rate on long-term capital gains and qualified dividends were also reduced to 15%, with lower income filers facing a 0% tax rate. The sunset provisions would move the capital gains rate back to a maximum of 20%, and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%Taxes on capital gains and dividends will increase, potentially costing investors an estimated $35 billion annually.
Adoption Tax Cedit
The adoption tax credit, currently $5,000 per child ($6,000 for special-needs children) was made permanent and increased to $10,000 for tax years beginning after 2001; it can be used to offset Alternative Mininum Taxes (AMT). For the adoption of a special-needs child after 2001, the $10,000 credit is allowable regardless of whether the taxpayer incurs any adoption-related expenses.
