It's the most significant new tax law in a decade, but what does it mean for you? Big savings for millions of taxpayers, more if you have young children or attend college, a lot more if you're wealthy.
The package, approved early Friday morning by the U.S. House and signed later in the day by President Barack Obama, will save taxpayers, on average, about $3,000 next year —and renews jobless benefits that could reach 250,000 Floridians.
But many families will be able to save much more by taking advantage of tax breaks for being married, having children, paying for child care, going to college or investing in securities. There's a tax break for paying local sales taxes — great for Floridians who don't have a state income tax to deduct — and a new Social Security tax cut for nearly every worker who earns a wage.
Most of the tax cuts have been around since early in the decade. The new law will prevent them from expiring Jan. 1. Others are new, such as the decrease in the Social Security payroll tax. Altogether, the tax package, which will cost $858 billion over two years, provides a menu of opportunities for families.
So, what happens to my tax rate?
Nothing, and that saves you money — it will cost the government about $187 billion. The tax package extends lower rates for two years for taxpayers at every income level, including the wealthiest 2 percent. The top rate, on taxable income above $379,150, would stay at 35 percent, instead of increasing to 39.6 percent. The bottom rate, on taxable income below $8,500 for individuals and $17,000 for married couples, would stay at 10 percent, instead of increasing to 15 percent. Figure out how much you might save at mytaxburden.org.
I hear my paycheck's supposed to get bigger. What's that about?
Workers' share of Social Security taxes will drop next year, to 4.2 percent from 6.2 percent. That means you'll take home more of your pay — and lawmakers hope you'll stimulate the economy by spending it. Someone making $42,450, the median income in Florida last year, would save $950. It won't affect the Social Security Trust Fund, which will get paid back, and employers' contributions won't change.
My unemployment benefits ended. Will they start again?
Well, not if you've exhausted 99 weeks of benefits. The new law keeps that the maximum anyone can receive. But the law does renew federal programs that expired last month, extending benefits beyond the 26 weeks states provide. Federal funding now goes through Jan. 7, 2012, which may mean an additional $650 million in payments to Floridians. When can you expect a check? Gov. Charlie Crist signed an executive order Friday to authorize benefits. Meanwhile, computer programming to restart federal benefits is nearly complete, said Robby Cunningham, spokesman for the Florida Agency for Workforce Innovation. Those now receiving the first stage of federal benefits — emergency unemployment compensation — should not have a lapse in benefits. For those who have extended benefits credits, payments should begin next week. People who believe they are eligible should check floridajobs.org beginning Wednesday.
Does everyone save money under the new law?
No, according to Consumer Reports.org. Individuals making less than $20,000 and households making less than $40,000 a year will actually get less tax relief next year than they got in 2010 and 2009. That's because "Making Work Pay," a temporary tax credit in the stimulus bill, is going away next year, the site's Money Blog reported. That credit provides up to $400 per individual and $800 per household for individuals making less than $75,000 a year, or couples making less than $150,000. Those making $20,000 to $40,000 won't take home enough in new payroll tax savings to offset the loss. The nonprofit, nonpartisan Tax Policy Center estimates that 51 million households, including many making $40,000 or less, would do worse under the new law.
What about the bigger child tax credit and other goodies?
The extensions include the elimination of the so-called marriage penalty and the doubling of the child tax credit to $1,000 per child. The law also increases the earned income tax credit, which benefits lower earners. It continues the elimination of limits on personal exemptions and itemized deductions, including a deduction for teachers' out-of-pocket expenses. It also continues a series of tax breaks for students and their families, including interest deduction for student loans and an exemption for employer-provided educational assistance.
Will I still be protected from the alternative minimum tax?
The law includes a two-year "patch" that will prevent the alternative minimum tax from hitting more than 20 million additional families with increases that could have averaged $3,900. The patch applies for tax years 2009 and 2010, which means that it will help people in the forthcoming filing season.
What are the implications for my investment portfolio?
It could be time to chat with your adviser, but most of the news is helpful. The current top 15 percent tax rates for dividends and for long-term capital gains will continue for 2011 and 2012. The extension takes the pressure off year-end plans — especially relief on the maximum rate for dividends, which would have zoomed to 39.6 percent, said Bill Sherman, a Fort Lauderdale lawyer who chairs the tax team for Holland & Knight. Meanwhile, older Americans may withdraw up to $100,000 a year from Individual Retirement Accounts, tax-free, to donate to certain public charities, for 2010 and 2011.
What happened to the estate tax? Should I see my estate planner?
Yes, the new law means it's time to update any wealth transfer plans — mostly because you can now transfer more money tax-free. Individuals will get a $5 million exemption from the estate tax and the gift tax, and the tax on the rest is capped at 35 percent for 2011 and 2012. Current law would have set a $1 million exemption and a 55 percent top rate for 2011. The change eases taxes on the top 1 to 2 percent of earners. "There will be a lot less concern about people that might die during the next few years," said Ed Koren, a Tampa lawyer who chairs the private wealth services group for Holland & Knight. "I have a pretty significant practice, and it's going to affect every one of my clients."
Are there benefits for businesses?
Companies will be allowed to write off 100 percent of many capital investments between Sept. 9, 2010, and Dec. 31, 2011. The law also allows 50 percent bonus depreciation in 2012. Meanwhile, dozens of provisions for research and development that expired at the end of 2009 will be extended through 2011. Among them are the research and development tax credit and favorable treatment of income earned from overseas financing operations. "Everything that was done for business is helpful," Sherman said.
Times staff writers Becky Bowers and Jeff Harrington contributed to this report, which includes information from the Associated Press, Bloomberg News, Consumer Reports and Reuters. Becky Bowers can be reached at email@example.com or (727) 893-8859. Follow her on Twitter at twitter.com/bbowerstimes.