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All Tax Breaks Are Not Created Equal

The sweeping tax bill President Obama just signed into law impacts just about everyone. But not all tax breaks were created equal.

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In many cases, higher earners may be keeping more cash in their pockets. Households with income of $500,000 to $1 million will gain $3,859 compared to current tax rules.

Wealthier Americans will benefit greatly from a two-year extension of current rates on long-term capital gains and dividends, keeping both at a top rate of 15%. Without the extension, the rate on long-term gains would have risen to 20%, and the top dividend rate could have risen to as high as 39.6% for the wealthiest taxpayers in the highest tax bracket.

Wealthy Americans hoping to pass on estates to their heirs get a break through the deal, which lowers the top estate-tax rate to 35% and increases the exemption to $5 million per individual. (Although, with such a high limit, most larger estates — especially those between the original pre-tax break, pre-expiration bonanza of 2010 ($3.5 million) and the new $5 million exemption limit — will benefit from this exemption in some way.)

Higher earners will also get the most out of the 2% Social Security tax cut, which maxes out at $2,136 for those who make more than $106,800.

The payroll tax cut applies to a broader group of taxpayers than the Making-Work-Pay income-tax credit of 2009 and 2010, but some lower-earning Americans will get a smaller boost under the current deal than they would have from the extension of that credit. For example, married couples earning less than $40,000 will get an average $210 less each under the payroll tax cut than they did under the Making-Work-Pay credit, The Wall Street Journal reported.

On the other hand, the law extends unemployment benefits for a year and keeps in place many tax breaks for low to middle income taxpayers, such as the child credit. The bill also contains a two-year patch for the alternative minimum tax and extends several education benefits.

Readers, how will your tax bill look in 2011 under the new law, compared to the previous rules? Who do you think stands to benefit the most?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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