Calculating How Much Extra Tax You Will Owe When Bush Tax Cuts Expire

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In a recent town hall President Obama pretty much confirmed that the Bush Era tax cuts will not be extended for higher income earners, but will be for those earning less than $250,000. While most people won’t be affected by these tax changes, there will be adjustments across all 2011 tax brackets and the marginal tax rate changes are what may affect many more people and small business’ than initially thought. This is because federal tax rates are marginal tax rates and only apply to the additional (or marginal) dollars above the next-highest tax bracket.

In other words, a person in the 25 percent tax bracket isn’t paying a 25 percent income tax, but paying (for 2010) 10 percent on the first $8,375, plus 15 percent on the next $25,625, and finally 25 percent on any income over that. So if you make $60,000 a year, your effective tax rate is actually 17.5 percent. Hence under a marginal tax rate system (used in most countries) people in the top brackets wiTax changes if Bush Tax Rates Expire For High Income Earnersll pay less in taxes on the share of income that falls within those lower brackets. The President tried to highlight this point in a recent press conference where he said, “for those who make more than $250,000, they’d still get tax relief on the first $250,000; they just wouldn’t get it for income above that.”

The Tax Policy Center has put together a useful Bush Tax Cuts Calculator to determine what your tax impact could be under the three possible tax structures; which are 1.) all tax cuts expire, 2.) current tax structure stays or 3.) Obama’s middle class tax extension proposal. For example, a married couple with 2 kids under 13 and earning $146,450 would save $2,871 under Obama’s proposal versus current tax laws. For a rich taxpayer who earns $500,000, their tax liability under the Obama plan rises to $149,742 or almost $11,000 more than with all the cuts extended But a little over $9,000 less than if they all expire.)

It is worth understanding your possible tax impacts now so that you don’t get a nasty surprise on next year’s taxes.

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5 Comments on "Calculating How Much Extra Tax You Will Owe When Bush Tax Cuts Expire"


juan palacio
Monday 9:50 am

What will become of the child tax credit under new tax legislation?

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WalkWild
Monday 9:52 pm

The largest tax hikes in US history were after FDR and WWII. The wealthiest Americans paid 95% on the top portions of their income. Today those of us who are wealthy pay around 25%. If you are reading this and are opposed to taxing amounts earned over 200,000 at a higher rate than 25%, consider this. Mr. Mark Hurd of HP got caught doctoring the company’s books to cover up an attempted sexual liaison with a contractor. If you got caught doing something like that by your employer what would happen to you? He gets to walk away with $28,000,000. With his loop holes – tax free,

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