The pressure is off -- at least for now. With the Bush-era tax cuts extended for all Americans for at least the next two years under the law signed today by President Obama, government leaders have managed to postpone some tough decisions to be made surrounding the U.S. tax code until 2012.
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The law has been labeled “compromise” legislation, and for good reason. In exchange for the tax-cuts extension, Republicans agreed to extend jobless benefits for the long-term unemployed. They also agreed to give a one-year tax break to workers, giving those who make approximately $40,000 annually an additional $800 in their pockets throughout the course of 2011.
So what can the average taxpayer expect in the year to come? According to experts, more of the same.
Here are some of the key things you should know regarding the new law, and what it means for your tax preparation in the year ahead and beyond:
The law affects more than just 2011.
Mark Steber, chief tax officer at Jackson Hewitt Tax Service, said the extension will affect taxpayers from all demographics for multiple years to come.
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“From a planning perspective, the law creates an environment for some planning, but not really long-term planning,” Steber said. “It will affect what to file, your paycheck and plans.”
Steber estimated that with the extension of the 10% tax rate, married taxpayers will see a savings of $900 on the first $17,000 of income, compared to without the extension, married taxpayers would have seen a reduction in the standard deduction of almost $2,000, resulting in a minimum tax increase of $300.
The most immediate benefit will be a 2% payroll tax cut.
Coupled with non-increasing tax rates, this element will put dollars in your pocket right away, Steber said.
“Taxpayers need to be watching for that immediate benefit,” he said. “Make sure you get what you should, and it meets your expectations.”
Jonathan Bergman, vice president at Palisades Hudson Financial Group, said because this money will be paid out throughout the year, rather than in one lump sum, Americans will be more likely to spend rather than save.
“They will look at their bank accounts, and realize they have extra money,” Bergman said. “They will feel a couple of hundred dollars richer, and they will be more willing to spend it.”
Payroll taxes will drop, and it is on your employer to act ASAP.
FBN’s Tracy Byrnes said for the average taxpayer, 2011 will be mostly status quo. The IRS has been preparing in anticipation of Congress being late on passing the law, and it is now up to employers to do some hustling.
“It’s a matter of if your company can get it done in time for Janurary 1,” Brynes said. “This is really an administrative thing now, it’s in their hands.” Companies that don’t get their tables ready in time will pay employers retroactively after January 1.
Tax preparation sites are up to speed.
Many won’t start filing until after the end of January, Byrnes said, and tax preparation sites are ready to hit the ground running.
“That is the upshot to tax preparation sites,” Brynes said. “They will pretty much be ready to go. And, you won’t have anything in your hands until after January 30, so you have 40-something days to scramble.”
Wealth transfer provisions are on target.
Without the bill, the estate tax would have touched many families in the country, with a low exemption rate of $1 million, Bergman said. The new bill kicks this up to $5 million, which Bergman said leaves plenty of room to breathe when it comes to gifts and estate taxes.
“$5 million dollars, even in New York, could be kind of comfortable,” he said. “Raising the exemption amount to $5 million will really hit wealthy families, not just the upper-middle class.”