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Bush Era Tax Credits Extended

Learn what recent legislation means for you, your family, your tax liability, and your job prospects for 2011.

Some people party all night long in anticipation, while others struggle to keep an eye open just to claim they witnessed it. Either way, New Year's Eve marks a celebration of the end of a year and hope for the New Year to come. The anticipation of the changing year may also bring with it a reminder to use up those earned days of vacation before you lose them; submit receipts against any monies you may have allocated toward a health savings account; or make last-minute charitable contributions, so you can deduct them from your taxes.

In Washington, D.C., however, the anticipation of the New Year carried a different tone, as political wrangling ensued among lawmakers in early December to address tax legislation enacted by the former President George W. Bush that was scheduled to expire on New Year's Eve.

After a lot of give and take among Democrats and Republicans alike, compromise legislation finally appeared on President Barack Obama's desk. And with two weeks to spare, the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 on December 17. The goal of the new legislation is to provide vital tax relief and investments in American workers that will create jobs and accelerate economic growth by extending existing tax rates for Americans across all income levels another two years.

A Middle-Class Victory

At the core of the legislation is what the President calls a "substantial victory for middle-class families across the country." Remarking at the signing of the legislation, he added, "They're the ones hit hardest by the recession we've endured. They're the ones who need relief right now. And that's what is at the heart of this bill."

Without new legislation, a typical working family would have seen a tax increase of more than $3,000 on January 1, 2011. This bill, however, avoids such a possibility by extending the existing income tax rates.

Other benefits for 2011 include the following:

  • A 2% Payroll Tax Cut. The agreement includes a payroll tax cut of about 2%, which will trigger about $112 billion in tax relief for more than 155 million workers. The net effect of this change is a windfall of about $1,000 for the average family. How nice to start the New Year with a little extra money in your paycheck.
  • An Extension of Unemployment Benefits. Emergency unemployment benefits have been extended at their current level through then end of 2011, preventing an estimated 7 million workers from losing their benefits as they seek employment. This benefit is for workers who lost their job at no fault of their own.
  • Tax Credits for College Tuition. The new American Opportunity Tax Credit is a partially refundable tax credit that will help more than 8 million college students who otherwise would have faced a tuition hike beginning next semester. In an effort to make the cost of college more affordable, the legislation continues the availability of up to $2,500 in tax credits for students and families.
  • Extensions of the Earned Income Tax Credit and the Child Tax Credit. These extensions will prevent millions of American families from facing poverty. Instead, millions of families with children will benefit from:
    • The Child Tax Credit: The $3,000 refund threshold established in the Recovery Act for the Child Tax Credit will be extended under the new legislation, ensuring an ongoing tax cut to 10.5 million lower-income families and 18 million children.
    • The Earned Income Tax Credit: The agreement continues a Recovery Act expansion of the Earned Income Tax Credit worth, on average, $600 for families with three or more children. It also reduces the "marriage penalty" faced by working married families. Together, these programs will help 6.5 million working parents and 15 million children.
    The White House's website provides an illustration of what these extended benefits could mean for a working, single mother of three children with an annual income of $20,000. With the new tax legislation signed by President Obama, this woman will receive a tax cut of more than $2,100 from the Earned Income and Child Tax Credits. She will also receive an extra $400 from the new payroll tax, for a total annual benefit of $2,500.

In addition to helping families, the legislation also includes tax incentives to help businesses grow and thereby spur job growth. For example, the new legislation allows companies to temporarily expense 100% of their investments in 2011 on their taxes. This program could generate upwards of $50 billion in additional investment in 2011, and provide funds for these same companies to expand operations, purchase new equipment and, perhaps most important to you and your family, hire more workers. Such actions are expected to spur economic recovery and boost employment figures.

After a year of massive unemployment, growing debt, and economic uncertainty, the fact that your income taxes won't increase and that tax incentives are in place to boost your paycheck, and to help you get a handle on affording college education and ensuring your family's livelihood, is definitely something worth celebrating.

Note: When it comes to taxes, seek the counsel of a financial expert who can identify which deductions will impact your bottom line most effectively once you are ready to file your taxes. Look in your local Yellow Pages or ask friends and family members for referrals to a certified public accountant who can help you with your specific situation.

Additionally, the CareOne Article Library is filled with many tax-related resources. Be sure to review some of these articles to learn more.

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