First Person: What the Tax Cut Bill Means for the Rest of Us

With the recent tax cut bill passing both the House and the senate and set to be signed into law, all that many taxpayers know is that taxes won't be going up next year. There are many provisions buried in the tax cut package, however, that may affect your paycheck next year. As a tax accountant, I see both positives and negatives to the passage of the bill. Here is what you need to know:

Payroll tax holiday

Currently, you pay 6.2% of your gross paycheck to Social Security. The new payroll tax holiday will see this reduced to 4.2% for 2011 only. This is available to everyone who pays into Social Security (up to income levels of $106,800). The savings this puts in your pocket is $600 if you make $30,000 and $1,000 if you make $50,000. The maximum credit is $2,136.

End of Making Work Pay credit

While the government is giving away money in the form of the payroll tax holiday on one hand, it is taking away with another. The Making Work Pay credit, which put $400 into most employees' pockets in 2009 and 2010 is disappearing. The payroll tax holiday that replaces it will provide a larger benefit for most employees than the old credit. Also, Making Work Pay was only available for those taxpayers who made less than $75,000. The new credit includes those at higher income levels.

Extension of 2010 tax cuts on all income levels

The tax cuts implemented under the Bush regime will continue for 2011 and 2012. The six income tax rates are: 10%, 15%, 25%, 28%, 33% and 35%. The tax cuts will also exempt many taxpayers from the Alternative Minimum Tax, allowing them to reduce their income with itemized deductions.

Estate taxes

The estate tax (called the "death" tax informally) was set to be re-instated in 2011 at a tax rate of 55% on estate values over $1 million. The new tax cut bill will change the estate tax to only apply to estates over $5 million and will apply a 35% tax rate to those estates. The main benefit of this change is to allow small businesses to be inherited by the next generation without having to sell the business to pay the estate tax.

Extension in unemployment benefits

Without renewing the enhanced unemployment benefits that job-seekers had in 2010, over 2 million people would have lost their eligibility at the end of the year. The extension provides benefits throughout 2011 for those unemployed more than 26 weeks and less than 99 weeks. This allows those looking for a job more time to find one in an economy where jobs are shrinking.

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