Should I Worry About The Expiring Bush Tax Cuts

It’s always funny to watch people get jumpy over a fifty-cent coupon on their next pizza purchase and then not worry about the fact that their largest expenses (taxes and healthcare) may change by thousands of dollars one year to the next.

People definitely delight in the occasional saving.  It’s a personal “win” and makes you feel like you beat the system.  However, if your goal is to use your money a little more effectively, it’s worth knowing the impact of political changes so that you can react (and vote) accordingly.

What Are the Bush Tax Cuts

For starters, the tax cuts passed in the early 2000s had a few significant impacts.  Based on 2010 brackets here are the noteworthy numbers versus pre-Bush tax levels.

  • You will save 5% on the first $8375 you make (~$419)
  • Plus 3% on income over $34,000 (another $480 for someone making $50K)
  • Plus $500 per kid (raised child credit from $500 to $1000)
  • Plus 5% on stock gains and 25% on dividends

Remember that your taxable income is far less than your salary.  Just for breathing, the government exempts $3,650 (personal exemption), and because the government knows your a generous giver they assume you have at least $5,700 in deductions (granted if you have more you can deduct that too).  So to be taxed as a $50K earner you would really need to make at least $59,350.

What You Can Do

Nothing. It’s politics. Or stop having kids just to get the child credit (I’ve heard they cost more than $1,000 per year to raise anyway).

No, actually there are some worthwhile moves.  First and foremost, be knowledgeable.  If the tax cuts don’t get extended, you (the average American) will likely bring home $400-800 less in income next year.  For those of you who simply spend the amount of money in your bank account each month, you will be fine but you will end up buying less and continuing your saving achievements of zero.  If you have a budget on the other hand, you may need to make some minor tweaks, but you should be ok.

Second, read the news.  The Democrats basically control the situation right now in D.C.  They want to raise taxes but don’t want to mess with people making under $200K.  If that’s you, then you’ll likely see no changes in taxes (healthcare is another issue).  If you make more than $200K then be afraid, kinda afraid.  Your taxes will likely increase by a few thousand dollars and your inability to lavishly spend, donate, or save like you used to may hurt the economy, but that’s up for debate.

Sigh of Relief

So it looks like the pending doom of slightly higher taxes won’t hit/hurt most of us, yet.  Larger concerns for your immediate finances are healthcare changes, but I’ll save that discussion for next week.  Do be aware that the national debt is swelling quickly and the long term impact is unknown.  Even if taxes don’t go up this year, they will go up eventually.

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Photo Credit (alancleaver_2000)
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