The Tax Cut Deal

President Obama and Congressional Republicans have reached a tentative deal to extend President Bush’s tax cuts for two more years. President Obama had wanted to extend the tax cuts, which are due to expire at the end of the year, to everyone except those who make over $250,000 (or $200,000 for individuals). The GOP wanted to extend President Bush’s tax cuts for everyone.

On Saturday, the Senate took two votes to extend the tax cuts for everyone except the wealthy. The first was for President Obama’s plan, and that vote was 53-37—a majority but not enough to shut off debate. The second vote, which the White House opposed, was to extend the tax cuts for everyone except for folks who make more than $1 million. That vote was 53-36. Again, it was a majority but not enough to shut off cloture.

That sent Congress and the president to the negotiating table. The deal calls for the entire Bush tax cuts to be extended until 2012. In addition, the Social Security payroll tax will drop from 6.2% to 4.2%. This will only be for next year.

As federal tax rates have fallen in recent years, many Americans find themselves paying more in Social Security taxes than in regular income taxes. As a result, this payroll tax holiday will have a broad impact. Under current law, Social Security will be taxed next year at 6.2% on your first $106,800.

The deal calls for a 13-month extension in unemployment insurance. The estate tax will also rise to 35% on everything after the first $5 million.

So far, Republicans seem much happier with the deal than Democrats. Paul Krugman wrote, “the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare.”

The most important part for investors is that the tax rate for long-term capital gains and dividends will stay at 15%.

Posted by on December 6th, 2010 at 9:51 pm


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