Get ready because here it comes! The tax breaks we’ve grown accustom to during the last decade are about to expire. What will it mean for you if the tax breaks are not extended? Let’s take a look.
Legislation: The two major tax-cutting bills from the Bush era were the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, and the Jobs and Growth Tax Relief Reconciliation Act of 2003. These laws cut taxes for earned income, long-term capital gains and dividends.
Tax Brackets: EGTRRA created six tax rate brackets—10%, 15%, 25%, 28%, 33% and 35%, based on income levels. If no extension is passed and signed into law, then the pre-2001 tax rates will go back into effect starting in tax year 2011. The 10% bracket would disappear, and those taxpayers would move up to the 15% bracket, which would apply to all incomes below $34,550. The other tax rates would increase to 28%, 31%, 36% and 39.6% for the highest earners making more than $379,650.
Child Tax Credit: One major provision that will expire at the end of 2010 is the child tax credit. It will revert back to $500 for tax year 2011.
Capital Gains/Qualified Dividends: The maximum tax rate on long-term 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%—ouch!
The “marriage penalty” is also set to expire. It gave a married couple filing jointly a standard deduction twice that of a single filer. As mentioned: be ready, pay attention, and talk with your advisors about what this all means for you.