Senate Democrats are seeking to extend tax cuts to the millions of middle-class Americans who deserve and need tax relief during these challenging economic times. With millions of Americans still out of work, this should be a policy that has broad support across party lines. Unfortunately, Congressional Republicans are threatening to let middle class tax cuts expire unless they can secure even bigger giveaways for millionaires and CEOs who ship American jobs to foreign countries. Listed below are key middle-class tax cuts enacted in 2001 (P.L. 107-16) and 2003 (P.L. 108-27) that are now being held hostage by Republicans.
Individual Income Tax Rates
Currently, taxpayers pay lower federal income taxes under the six income tax rate brackets — 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent – than they would otherwise under the previously higher rate brackets of 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent. People in the higher income brackets benefit from the lower tax rates of all brackets below theirs, because these rates apply only to the income in each bracket’s range. (In 2009, a married couple making over $250,000 would be in the 33 percent bracket and a single filer making $200,000 would also be in the 33 percent bracket.) Without an extension to keep these lower tax rates, the lowest tax bracket will disappear and all the tax brackets will revert back to the higher rates.
Marriage Penalty Relief
Married couples currently have relief from the “marriage tax penalty,” or the additional tax over and above what a married couple would otherwise pay if they were single filers. Specifically, the standard deduction for a married couple filing jointly is twice that of a single filer and the 15% rate bracket is twice the size as the bracket applicable to single filers. In addition, in 2001 and later in the American Recovery and Reinvestment Act (P.L. 111-5), Congress had lowered the marriage penalty under the Earned Income Tax Credit (EITC), which reduces the credit for low-income workers who file as a married couple. All these marriage penalty relief benefits are set to expire at the end of 2010.
Capital Gains and Qualified Dividends
Currently taxpayers pay lower taxes on the profits they realize on their assets, such as stocks and real estate investments, and on the dividend payments they receive from holding stock investments. The maximum tax rate on long-term capital gains and qualified dividends is currently 15 percent. For taxpayers in the two lowest income tax brackets (i.e., married couples making less than $68,000 and single filers making less than $34,000 in 2010), the tax rate on their long-term capital gains and qualified dividends is 0 percent.
Without an extension, the maximum tax rate for capital gains will rise from 15 percent to 20 percent and qualified dividends will be taxed at ordinary income tax rates that reach as high as 39.6 percent. (People in the lowest two brackets, who currently pay no taxes on their capital gains and dividends, would be taxed 10 percent on their capital gains and 15 percent on their dividends.)
Child Tax Credit
The Child Tax Credit is a valuable benefit that can significantly reduce middle-class families’ tax liabilities. The 2001 law doubled the child tax credit from $500 to $1,000 per child and allowed more taxpayers to qualify for the refundable portion of the credit. Without an extension, the maximum amount of the credit will revert back to $500 and eligibility standards will become stricter.
Education Tax Benefits
Families saving for college or K-12 school expenses through a tax-favored Coverdell Education Savings Account can currently contribute up to $2,000 a year (rather than the previous limit of $500 per year). They also enjoy other expanded contribution and eligibility rules. For taxpayers with college loans, the student loan interest deduction is currently more generous than it was previously. Specifically, more people with higher incomes can now claim the deduction, there is no longer a limit on the number of months that interest payments are deductible, and taxpayers can deduct their voluntary payments of interest on their student loans. Without an extension, these education tax benefits will expire.
Child Care and Dependent Care Tax Credit
This tax credit helps middle class Americans afford care for a child, spouse, or dependent. Currently, up to $3,000 in child care expenses for a child (up to $6,000 for two or more children) is eligible for the credit, and the credit can be up to 35 percent of those expenses. Without an extension of the tax cuts that made this valuable credit more generous, the amount of creditable expenses will revert to a lower limit and the credit will be worth only 30 percent of those expenses.