By NEMS Daily Journal
Most employees will be getting a little extra in their paychecks this year.
And that’s just fine with Cheryl Walls, a quality control inspector with Southern Motion in Pontotoc.
“With any money I get I’ll use to help pay extra on bills,” she said.
The extra money that Walls and millions of other taxpayers get comes from President Barack Obama’s signing last month of a bill extending the Bush tax cuts for two years.
On average, taxpayers will save about $3,000.
Several tax breaks were included in the $858 billion compromise legislation negotiated with Republicans, including an extension of jobless benefits.
For investors, good news comes in the form of the maximum tax on long-term capital gains and dividends staying at 15 percent.
The alternative minimum tax will get another patch to keep 20 million middle-income families from paying an additional $3,900 the next two years.
The payroll tax cut for this year will be seen almost immediately, although some companies may take until the end of the month to get the details worked out.
Someone earning $50,000 a year will save $1,000 because workers will pay a lower Social Security tax – 4.2 percent rather than 6.2 percent. The maximum benefit of this particular cut is $2,136.
The payroll tax cut is good for only this year, however.
In addition to the payroll tax cut for workers, families also will benefit from tax breaks for being married, having children, paying for child care, going to college or investing in securities.
Tax breaks for paying local sales taxes and using mass transit also are included, although few Northeast Mississippians will take advantage of the latter.
Lower tax rates will apply for the working poor, the middle class and high-income earners.
At the request of The Associated Press, The Tax Institute at Hamp&R Block developed detailed estimates for how the new law will affect families at various income levels next year:
- A single taxpayer making $50,000 a year who rents an apartment and pays $3,500 in college tuition and fees would save $2,280 in income taxes and $1,000 in Social Security taxes – a total of $3,280.
- A married couple with two young children, some modest investments and combined wages of $100,000, would save $6,256 in income taxes and $2,000 in Social Security taxes – a total of more than $8,200.
Income taxes would be lower because of the lower rates, a $1,000 per child tax credit and a $1,200 tax credit for child care expenses. The couple earns $2,000 in dividends but it would be tax-free at their income level. Wealthier investors would pay a top tax rate of 15 percent on dividends. The couple would also be spared from paying the alternative minimum tax, and would pay lower Social Security payroll taxes.
- A married couple with a child in high school and another in college, combined wages of $170,000 and larger investments would save nearly $7,800 in income taxes and $3,400 in Social Security taxes – a combined savings of nearly $11,200.
Income taxes would be lower because of the lower rates and more generous deductions for state and local income taxes, property taxes, mortgage interest and charitable donations.
Assuming the couple earned $4,000 in qualified dividends and $5,000 in capital gains, that income would be taxed at 15 percent, instead of the higher rates that would have taken effect without the new law.
At their income level, the couple wouldn’t qualify for the child tax credit and would get only $125 from the education tax credit. However, they would save more than $3,600 because they would be largely spared from the AMT.
“One thing generally about the higher-income taxpayers is that even though they have a lot of opportunities, they also phase out of a lot of benefits that are designed for lower- to middle-income taxpayers,” said Gil Charney, principal tax analyst at The Tax Institute at H&R Block.
Own a business?
Businesses also will get a break.
Companies buying equipment and other capital goods normally can write them off on their taxes over time, otherwise known as amortization.
However, businesses can now take a 100 percent deduction on capital investments in the same tax year they were made. The idea behind this is that businesses will finally buy the equipment they’ve been delaying because of the recession.
However, Leslie Groome, the tax manager of Tupelo accounting firm Nail McKinney, said businesses need to tread carefully.
“The one thing I would caution businesses about is balancing their cash flow,” she said. “If you take the large capital write-off up front and are financing the investment, then you can end up with a cash flow mismatch as you are paying for the investment over a period of years but don’t have a depreciation deduction since you deducted it all in the first year.”
Several other business tax breaks were included in the legislation signed by Obama, numbering about 40.
“The biggest tax break that affects a broad base of businesses is the accelerated depreciation,” Groome said. “There are many business credits that were extended but many of these are targeted to very specific activities and will not affect a broad range of businesses.”
Accelerated depreciation should result in $200 billion in tax savings for companies in the first year and benefit 1.5 million companies and several million individuals who run businesses, experts say.
Daily Journal Business Editor Dennis Seid and the Associated Press contributed to this report.
What’s it mean to you?
- To figure out how the tax deal will affect you personally, plug your income into mytaxburden.org.