What are the “Bush Era Tax Cuts” That Everyone is Talking About?

The news is full of talk about President Obama wanting to repeal “The Bush Tax Cuts” for the wealthy. Also, the compromise tax law that passed at the end of 2010 is scheduled to expire or “sunset” on December 31 of this year – sort of automatically repealing the tax cuts for everyone. But what are the tax cuts? How will the changes look basically? That is the key.

1.  Income Tax:

The personal income tax rates would revert to 2001 levels, so:

• Current rates – 10%, 15%, 25%, 28%, 33%, and 35%
• Revert to old rates – 15%, 28%, 31%, 36%, and 39.6%

Capital gains rates would also revert to 2001 levels as well. Short term capital gains (assets held less than one year) would continue to be taxed the same as the ordinary rate. Long term gains (assets held a year or more) would see higher capital gains taxes.

Currently:

Bracket	10%	15%	25%	28%	33%	35%
Long term gain(held longer than 1 year)	0%	0%	15%	15%	15%	15%

Revert to old rates:

Bracket	15%	28%	31%	36%	39.3%
Long term gain	10%	20%	20%	20%	20%

Dividends – Additionally, dividends which are now taxed at the long term capital gains rate for the individual will be taxed at the ordinary rate for the individual.

Marriage Penalty – The so called marriage penalty would return to married filers. Currently “married filing joint” taxpayers enjoy a standard deduction double that of “single” filers. This would no longer be true if the current tax law expires. Instead, married couples would see a standard deduction less than 2 times the single filer – resulting in higher tax for being married.

Also, the 15% bracket has been expanded for married filers to twice the size it would be for single filers so as to make married filers have the same tax rates. This would be lost if the current law were to revert back to the pre-Bush tax rules.

Child Tax Credit – The $1000 per child tax credit many now enjoy would be lost.

Earned Income Tax Credit – This credit would be reduced or eliminated for some tax payers who currently are eligible.

Adoption Credit – Would be reduced from its current $13,360 max to $10,160.

Dependent Care Credit – Eligible expenses reduced from $3,000 to $2,400 (from $6,000 to $4,800 for more than one qualifying individual); also maximum credit will reduce from 35% to 30% of the qualifying expense. This means, if you have one dependent for example, your credit would shrink from $1,050 in 2012 to $720 in 2013.

2.  Estate Tax:

Exemption/Credit Shelter amount for estate tax – is reduced from current $5 million per person to $1 million per person.

Estate Tax rates increase with the maximum going from 35% to 55%.

State Death Tax Credit is revived – this may be an advantage for tax payers.

There are certainly more “reversions” that may affect you personally. But these highlights show what the debate about repeal of the “Bush Tax Cuts” is about. Perhaps the repeal will be limited to certain aspects affecting only “wealthy individuals”, but if the current law expires all the cuts are eliminated. So please, pay attention and know how these changes might affect you.

As always, consult with your personal tax and legal professionals to see how these changes and others may apply to you.