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The way that the question is asked may display a person's attitude to the answer. While appearing on the broadcast show Face the Nation, Senator Jon Kyl, Republican from Arizona, took offense to the usage of "tax cuts." He prefers to simply refer to the action as "extending the rates that have been in existence for the last decade." I would agree with him if it were not for the fact that the tax rates that have been in existence for the last decade were voted in for just a specified period of time and then to be replaced by the higher rates.
Senator Kyl voted for those tax rates to expire on December 31, 2010 to be replaced with the higher rates and now he wants to change his mind! End of political rant on that issue.
Congressional leaders and the White House may have reached a compromise that will allow for the continuation of the tax rates for the next two years and then as an added bonus reduce the amount of the FICA tax that is deducted from workers pay by 2 percent. That is an unexpected windfall and could add $2136 to the pockets of a worker earning $106,800 the maximum amount subject to social security tax. It could be doubled for a family with two high earners.
The capital gains rate remains at 15 percent maximum and certain investment dividends will also be taxed at the maximum rate of 15 percent.
For the taxpayer with an AGI of $55,000 or less ($110,000 Married Filing Jointly) they will receive a refundable tax credit of $1000 for each child under the age of 17. This was slated to be reduced to $500. A refundable credit is important because it can increase your refund whereas a non refundable credit can only reduce your liability. Assume that your tax liability was $500 and that there is a credit of $1000. A non refundable credit will result in a zero return whereas the refundable credit will entitle you to receive a payment of $500.
The credits for higher education will remain unchanged for the next two years.
As part of the compromise the Alternative Minimum Tax patch will be in effect that will maintain the exemptions at the same levels adjusted for inflation. A brief and incomplete explanation of the AMT is that a calculation is performed simultaneously on your tax return that disallows certain deductions, lowers your medical deductions and exempts a fixed amount of your income. The result is then taxed at 26 percent. You are responsible for paying the higher of the AMT or regular tax.
With the 2 percent kicker from the reduction in the social security tax many Americans will have more money to spend in 2011. We can expect to hear more political discussion on taxes for the balance of this year, next year and during the campaign season.