The Bush Tax Cuts

What were they and what would have happened if they had expired.

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Everybody complains that our tax laws are too complicated. One thing that makes them complicated is that they keep changing. Congress has gotten into the habit of enacting temporary tax breaks--that is, tax provisions with expiration dates. The most significant temporary tax laws of the last decade are the "Bush Tax Cuts"- a slew of tax cuts enacted by Congress and the Bush Administration during 2001 and 2003. These cuts were originally set to expire at the end of 2010, but were extended for 2011 and 2012. Just before they were set to expire at the end of 2012, Congress passed the fiscal cliff tax deal deal on January 1, 2013. 

    A Look at the Bush Tax Cuts

The Bush Tax Cuts affected virtually all taxpayers, rich and poor alike. If they had not been extended in part, many people (other than the highest-income earners) would have owed more in taxes. The following chart shows what would have happened if the most important of these cuts had not been extended.

Expiring Provision

Effect If Not Extended

Reduced Capital Gain Rates for Individuals

 

Capital gains will be taxed at a 20% rate (increased from the current 15% rate).

 

Dividends of Individuals Taxed at Capital Gain Rates

 

Dividends received by individuals will be treated as ordinary income and taxed at top income tax rate rather than as a capital gain, currently 15%.

 

10% Individual Income Tax Rate

 

The 10% income tax bracket will be removed; the lowest income tax rate bracket will then be 15%

 

Tax Rates in Top Four Brackets

 

Tax rates in the top four brackets will be increased to (from current rate): 39.6% (35%), 36% (33%), 31% (28%), 28% (25%).

 

Increase in Standard Deduction for Married Couples

 

The standard deduction for married couples (currently 200% of the deduction for singles) will be reduced to 167%. As a result, low-income and middle-income two-earner couples will owe more to the IRS than they would if they were single making the same income.

 

Repeal of Overall Limits on Itemized Deductions (the "Pease Limitation")

 

Limits on itemized deductions will be restored (currently, there is no limit on allowable deductions). The total amount of itemized deductions will be reduced by 3% of the amount by which a taxpayer's adjusted gross income exceeds a certain threshold. As a result, high-income households may not be able to take some itemized deductions.

 

Repeal of Personal Exemption Phase Out

 

Under present law, the amount of a taxpayer's personal exemption is not phased out. A phase out of personal exemptions will be restored in 2013 for taxpayers above a certain threshold. As a result, high-income households may not be able use personal deductions in full.

 

 

Decreased Estate, Gift, and Generation-Skipping Transfer Tax

 

Reverts to pre-2001 levels. The estate and gift tax exemption level will be decreased from $5 million to $1 million, while the top tax rate will increase from 35% to 55%.

 

The Fiscal Cliff Tax Deal

On January 1, 2013, the fiscal cliff tax deal was signed into law. Under the new tax law, tax rates are now permanently set at the higher Clinton-era levels for families with income above $450,000 and individuals with income above $400,000. All income below those threshold amounts will be taxed at the Bush-era lower rates. In addition, the estate tax is set at 40 percent with a $5 million exemption. 

For more information on the tax legislation that passed on January 1, 2013 and how it affected personal exemptions, itemized deductions, and other Bush Tax Cut era provisions, see How does the Fiscal Cliff Tax Deal Affect Your Taxes?

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