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Tax Cut Extension/Implications

 

We finally know what will happen to the expiring Bush tax cuts - they won't expire for another two years. In a compromise announced by President Obama last night, the Bush tax rates become the Obama tax rates for 2011 and 2012. And for everyone, not just families making less than $250,000. The compromise? The Republicans will agree to extend unemployment benefits for another 13 months and won't demand that the $60 billion cost be offset by a cut in federal spending.
Not only did the wealthy get a two-year pass on their income tax rate, but they are also going to benefit from two other features of the compromise:

A one-year cut in the payroll tax: To make up for the loss of the expiring Making Work Pay tax credit - the middle-class tax cut that no one really noticed - the White House extracted a one-year reduction in the Social Security payroll tax paid by employees from 6.2 percent to 4.2 percent. What's interesting is that Make Work Pay had an income limit: it was completely phased out for individuals making $95,000 or more, and joint filers with income above $190,000. The proposed 2011 payroll tax reduction now applies to everyone, at a reported cost of $120 billion in foregone tax revenue. That means an extra $2,172 in the 2011 paychecks for all Americans making at least $108,600, the current maximum amount of income subject to the FICA tax. The goal of this tax break is to give a jolt to the anemic economic recovery on the assumption that everyone -
the middle class and the truly wealthy - will go out and spend that money.

A big break in the estate tax : When we last left off with the estate tax in 2009, it was being levied on estates above $3.5 million ($7 million for married couples) at a top rate of 45 percent. The estate tax has been on hiatus in 2010 and was scheduled to come roaring back next year at its 2001 level: a 55 percent tax on estates above $1 million. No one really expected that to happen, but the deal announced by President Obama sure seems like a huge capitulation to the Republicans. In fact, the President went out of his way in the press conference announcing (somewhat ironically) that he wasn't too pleased with this outcome. The new estate tax rate will only be levied on estates over $5 million ($10 million for couples), and the 45 percent rate of 2009 dips to 35 percent for 2011 and 2012.  Maybe George Steinbrenner died too soon?   
 
Assuming the framework of the deal announced Monday night makes its way through Congress, here's what we can look forward to in 2011 and 2012:  
Income tax rates: Nothing changes from today. The top two tax brackets, which President Obama had vowed to raise, will instead remain at 33 percent and 35 percent. Even the millionaires and billionaires will see their tax rate hold steady, not just the middle class.  Many people with theoption of deferring income (and thus, taxes) into next year, may decide to go for the deferral and pull as many deductions as possible into this year so they can benefit from those now. If you've converted a Roth retirement account this year, or plan to by year-end, it certainly may make sense to take advantage of the one-time tax deal being offered for 2010 conversions that allows you to spread the tax bill over the next two years.

Capital gains and dividend taxes: No change here, either. President Obama had wanted the current 15 percent rate to float up to 20 percent for wealthy Americans in the top two tax brackets. But the compromise keeps the rate at 15 percent for everyone.   This may increase the allure of dividend paying stocks.

A "patch" for the Alternative Minimum Tax (AMT): A patch that will raise the AMT exemption to account for inflation has been agreed to. According to the New York Times <http://us.lrd.yahoo.com/SIG=12eeosn7g/**http%3A/bucks.blogs.nytimes.com/2010/12/07/what-the-tax-deal-means-for-you> , the threshold for the AMT will be adjusted so that as many as 21 million households would not be subject to it.

Real Estate and Mortgages: No news may be bad news, with a little good news sprinkled in.  Markets for rates of interest have risen sharply (bad news), even as the Federal Reserve and it's Chairman have suggested they will act to lower rates.  Bernanke actually did his second 60 Minutes interview on Sunday.  Maybe he should stop doing those interviews.  We've seen a .50% increase in rates on mortgages of nearly every type, although jumbo mortgages have not risen by that quite amount.  There was a lot of chatter about eliminating the mortgage interest deduction as part of these far-ranging discussions, but that appears to have been tabled (for now.)  Rates are still very attractive and this may continue to be a very special and unique time for borrower's everywhere to assess their individual situation and see how they may benefit.

Kevin

Kevin R. Kenyon
Branch Manager
NMLS #8677
Gateway Funding Diversified Mortgage Services, LP
D/B/A Arlington Capital Mortgage
33 Witherspoon Street
Princeton, NJ 08542
kkenyon@arlingtoncapital.com
Direct 609.945.7513
E-Fax 215.793.8201
Licensing information at www.gateway-funding.com <http://www.gateway-funding.com/>
Company NMLS #1071

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