The final, bipartisan legislation to prevent Americans’ taxes from going up at the end of the month was released by Congress on Thursday night. The Republicans’ demands to stop the pending tax hikes on income, AMT and estate are all included in the legislative language.
On Monday, Senate Majority Leader Harry Reid (D-N.V.) has scheduled the debate on the compromise agreement negotiated between Congressional leaders and President Obama. The final Senate vote on the tax cut bill is expected on Tuesday. If the bill gets the necessary 60 votes for passage in the Senate, it will then go to the House. The House Democrats, who are in the majority until January, have threatened to block the bill.
“This agreement does two things the economy needs: prevents a tax increase on all Americans who pay income taxes and provides a foundation for job creation. The failure to move this agreement forward will be a devastating blow to American taxpayers, small businesses and our nation’s economic recovery,” said Rep. Dave Camp (R-Mich.) in a statement. Camp will be Chairman of the Ways and Means Committee, which writes the tax code, when the Republicans take control of the House in January.
The specific provisions in the tax legislation are as follows:
• Income Tax: The bill prevents the tax increases which are set to hit every American on January 1. The agreement extends for two years the income tax rates, which were cut by President Bush in 2001 and 2003. The current income tax rates range from 10% – 35%. If these tax cuts are not extended by the end of the month, the income tax rates will range from 15% -39.6%.
The income tax rates will also stay the same for over $250,000 tax bracket, about half of whom are small business owners who file as individuals. Republicans demanded that these small business owners keep the same tax rates so that they will create new jobs to help alleviate the almost 10% unemployment.
The agreement also preserves both the marriage penalty relief and the per child tax credit, which were part of the Bush tax cuts in 2001 and 2003. The per child tax credit was set to go down from$1,000 to $500 per child at the end of the month.
• Death Tax: The estate tax, otherwise known as the death tax, is set to go from 0% this year to 55% for any estate over $1 million in 2011. The tax cut bill has a bipartisan compromise on death tax, which was proposed by Senate Majority Leader Mitch McConnell (R-Ky.). The agreement prevents ten times the number of family owned business and farms from being hit by the death tax. The agreement will exempt all assets up to $5 million from any death tax. Those estates over $5 million will be taxed at 35% for the next two years.
• Alternative Minimum Tax (AMT): The Democrat-controlled Congress did not adjust the AMT limits for inflation this year, making as many as 21 million families at risk of getting hit with an extra $2,000 tax this year. The agreement adjusts for inflation the AMT for 2010 and 2011 to prevent the tax hike on middle class families.
• Capital Gains and Dividends Taxes: The legislation maintains the current 15% top tax rate on long-term capital gains and qualified dividends. The rates were set to go up to 20% for capital gains and 39.6% for dividends on January 1.
• Payroll Tax: The Republicans demanded to end the President’s Make Work Pay credit, which was in his stimulus spending bill. The agreement replaces Obama’s refundable tax credit with a 2% payroll tax credit for workers for one year. The agreement will reduce by one-third the share of the payroll tax paid by the employee, lowering it to 4.2%.
To prevent tax hikes on all Americans, the House and Senate must pass the tax relief legislation by December 31. As the lame-duck Democrats are still in the majority in the House, the stumbling block to final passage seems to be whether President Obama can get Speaker of the House Nancy Pelosi (R-Calif.) on board with the compromise. The White House continues to negotiate with the House Democrats to get their votes for the tax relief agreement.