We’ve been saying in my office for months that Obama would extend the Bush tax cuts. It seemed a given with the unemployment rate stuck near 10% and horror stories circulating about how higher taxes contributed to the lost decade of the 1930’s. Obama, especially now that he has entered the third year of his presidency, seems willing to compromise and unwilling to watch our economy deteriorate further. Perhaps there’s some political motive to his recent mindset but either way I’m relieved to keep those tax rates where they have been for another two years. Below is a recap of the tax relief extension. I figured this would be a good topic for a blog post because tax rules are often dense, and change pretty frequently.
Perhaps the most important thing which is staying the same is the tax rate structure. For the next two years we’ll continue to have 10, 15, 25, 28, 33 and 35% brackets. If you’ll recall, letting the Bush tax cuts expire would have brought us back to marginal rates of 15, 28, 31, 36, and 39.6%. The tax rates on dividends and capital gains will also be extended which was a huge concern for people in my industry. The phase-out of the personal exemption ($3,650 last year) will also be suspended for now, until 2012. The increased standard deduction for married couples is also extended until 2012.
One of the more interesting and potentially stimulative pieces of tax relief we got was a reduction in the employee portion of Social Security taxes from 6.2% to 4.2%. This should amount to a ‘mini pay raise’ for millions of Americans, particularly those younger workers who will more than likely have delayed Social Security payments in the future. Unemployment benefits were also extended for those who are out of work and looking.
For students and parents of students, tax benefits for education have been extended through 2012, including the expanded student loan interest deduction. The American Opportunity Credit will also remain and allows taxpayers below a certain income threshold to deduct tuition payments.
The estate tax, one of the stickiest political issues will proceed as follows: the first $5 million of an estate will be exempt from taxation and each dollar above that will be taxed at 35%.
There’s also a bunch of extensions on energy provisions which were set to expire.
Overall this tax compromise wasn’t what Obama had in mind when he entered the White House. However, with high unemployment and QE2 backfiring to some extent on the Fed, these tax cut extensions are an added form of stimulus which hopefully get this economy the traction it needs.
As always, feel free to contact me with questions about how taxes can affect your individual financial plan. We also have tax professionals in the office that can be of assistance to you this tax season.
Happy holidays!
Russell Bailyn
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.