Taxpayers Face Uncertainty in 2011 As Bush and Obama Tax Cuts Expire

May 26, 2010
By 

[Note: Corrections were made to some information contained in this report, as indicated, on 7/20/2010]

Fiscal Fact No. 227

Polls show that many Americans are anxious about their taxes and believe their payments are rising. At first glance this seems like a public misperception because tax policy at the end of the Bush administration and the beginning of the Obama administration has been dominated by a blizzard of tax cuts, most narrowly targeted at a few taxpayers but some broadly benefiting low- and middle-income people. But paradoxically, the people are right to be worried about high taxes. With federal deficits growing and the U.S. debt mounting to alarming levels, Congress will soon need to cut spending or raise taxes to shore up the long-term fiscal outlook.

These serious long-term concerns about the fiscal health of the nation have implications in the near term. The end of 2010 is an obvious turning point for tax policy as the Bush-era cuts and Obama's new temporary making-work-pay credit are all expiring at the same time. The handling of these expiring tax provisions may be an indication of what tax policy will look like in the years to come.

The personal income tax has typically been Congress's vehicle of choice to raise or cut taxes. Here we calculate what some typical tax returns will look like for tax year 2011 under three scenarios:

  • the tax policies that prevailed before President Bush was elected;
  • all Bush-era tax policies extended to 2011 (with no Obama changes); and
  • combined Bush and Obama policies, as outlined in the President's FY 2011 Budget.

The Bush-era personal income tax cuts that expire at the end of this year included reductions for high-, low- and middle-income earners. Some provisions helped just low-income people, some helped low- and middle-income, some middle- and high-income, and some just high-income people. Proceeding roughly up the income spectrum, then, they:

  • made more married taxpayers eligible for the earned income tax credit (EITC);
  • created the 10% income tax bracket;
  • raised the standard deduction for couples to double the single amount;
  • increased the child tax credit from $500 to $1,000 per child and made it refundable;
  • raised the ceiling of the 15-percent bracket to double what it is for singles;
  • lowered the 28-percent rate to 25 percent;
  • lowered the 31-percent rate to 28 percent;
  • lowered the 36-percent rate to 33 percent;
  • lowered the 39.6-percent rate to 35 percent; and
  • reduced and finally repealed the phase-out of itemized deductions and personal exemptions.

Generally speaking, President Obama has proposed extending or making permanent most of the Bush-era tax cuts, that is, all those that benefit families making less than $250,000 ($200,000 for a single filer). He proposes letting expire all those that benefit taxpayers over those thresholds. He has also proposed a few new tax policies:

  • increasing the EITC for taxpayers with 3 or more children;
  • further expanding eligibility limits for married taxpayers claiming the EITC;
  • reducing the requirements for qualifying for the refundable portion of the child tax credit; and
  • extending the new making-work-pay tax credit through 2011.

Below are tax calculations for a few sample taxpayers. Since it's not clear how Congress and the President will deal with the expiration of all the tax cuts, we calculate them in three ways. The first is what taxes would have been in 2011 if neither the Bush nor Obama tax cuts ever existed (what we call 'Pre-Bush' policy). This is essentially the tax law that was in effect when President Bush was elected and what tax law would be if all the Bush tax cuts were allowed to expire on schedule at the end of 2010. The second scenario is what taxes would be if all Bush-era tax policies were still in effect in 2011. Finally, we look at what taxes would be in 2011 under Obama's proposed tax policies.

Note that several important variables are not included in these calculations: The tax hikes enacted as part of health insurance reform do not apply to 2011, so they are not included here. Also excluded are some tax credits and deductions that a taxpayer may or may not qualify for, such as education tax credits. Here we are highlighting the more 'automatic' tax provisions built into the tax code that depend only on income and family structure. All income is assumed to be in the form of wages. A negative tax liability represents a tax refund, that is, a check from the federal government to the taxpayer. An AMT patch is assumed for all policy scenarios.

Table 1

Summary: Taxes Owed (+ or -) on Typical Tax Returns

Pre-Bush

Bush

Obama

Single Parent, One child, $25,000

- $928

- $1,881

- $2,281

Married couple, two earners, three children, $45,000

$1,020

- $1,510

- $3,183

Married couple, one earner, two children, $50,000

$2,825

$688

- $112 *

Married couple, two earners, two children, $85,000

$7,235

$5,383

$4,583

Single, no children, $60,000

$8,236

$7,484

$7,084

Single, no children, $150,000

$29,962

$26,996

$26,996

Married couple, two earners, two children, $150,000

$22,776

$19,268

$18,468

Married couple, two earners, two children, $300,000

$64,181

$61,292

$65,287 *

Married couple, two earners, no children, $500,000

$130,210

$123,900

$130,342

Married couple, two earners, no children, $1,000,000

$298,510

$254,167

$307,342

 

Table 2

Summary: Effective Tax Rates (Taxes as a % of Income) of Typical Tax Returns

Pre-Bush

Bush

Obama

Single Parent, One child, $25,000

- 3.7%

- 7.5%

- 9.1%

Married couple, two earners, three children, $45,000

2.3%

- 3.4%

- 7.1%

Married couple, one earner, two children, $50,000

5.7%

1.4%

- 0.002% *

Married couple, two earners, two children, $85,000

8.5%

6.3%

5.4%

Single, no children, $60,000

13.7%

12.5%

11.8%

Single, no children, $150,000

20.0%

18.0%

18.0%

Married couple, two earners, two children, $150,000

15.2%

12.8%

12.3%

Married couple, two earners, two children, $300,000

21.4%

20.4%

21.8% *

Married couple, two earners, no children, $500,000

26.0%

24.8%

26.1%

Married couple, two earners, no children, $1,000,000

29.9%

25.4%

30.7%

 

Table 3

Typical Tax Return: Single Parent, Low Income

Filing Status

Head of Household

Children

1

Income

$25,000

 

Pre-Bush

Bush

Obama

Standard deduction

-

$8,550

$8,550

$8,550

Personal exemptions

-

$7,400

$7,400

$7,400

Taxable income

=

$9,050

$9,050

$9,050

Tax on taxable income

 

$1,358

$905

$905

Child credit (non-refundable portion)

-

$500

$905

$905

Earned income tax credit

-

$1,786

$1,786

$1,786

Additional child tax credit

-

$0

$95

$95

Making-work-pay tax credit

-

--

--

$400

Tax liability

=

- $928

- $1,881

- $2,281

Table 4

Typical Tax Return: Family of 5, Two Earners, Low Income

Filing Status

Joint

Children

3

Income

$45,000

 

Pre-Bush

Bush

Obama

Standard deduction

-

$9,700

$11,600

$11,600

Personal exemptions

-

$18,500

$18,500

$18,500

Taxable income

=

$16,800

$14,900

$14,900

Tax on taxable income

 

$2,520

$1,490

$1,490

Child credit (non-refundable portion)

-

$1,500

$1,490

$1,490

Earned income tax credit

-

$0

$0

$873

Additional child tax credit

-

$0

$1,510

$1,510

Making-work-pay tax credit

-

-

-

$800

Tax liability

=

$1,020

- $1,510

- $3,183

Table 5

Typical Tax Return: Family of 4, One Earner, Low-Middle Income

Filing Status

Joint

Children

2

Income

$50,000

 

Pre-Bush

Bush

Obama

Standard deduction

-

$9,700

$11,600

$11,600

Personal exemptions

-

$14,800

$14,800

$14,800

Taxable income

=

$25,500

$23,600

$23,600

Tax on taxable income

 

$3,825

$2,688

$2,688

Child credit (non-refundable portion)

-

$1,000

$2,000

$2,000

EITC

-

$0

$0

$0

Additional child tax credit

-

$0

$0

$0

Making-work-pay tax credit

-

--

--

$800 *

Tax liability

=

$2,825

$688

- $112 *

Table 6

Typical Tax Return: Family of 4, Two Earners, Middle Income

Filing Status

Joint

Children

2

Income

$85,000

 

Pre-Bush

Bush

Obama

Itemized deductions (a)

-

$15,300

$15,300

$15,300

Personal exemptions

-

$14,800

$14,800

$14,800

Taxable income

=

$54,900

$54,900

$54,900

Tax on taxable income

 

$8,235

$7,383

$7,383

Child credit (non-refundable portion)

-

$1,000

$2,000

$2,000

Earned income tax credit

-

$0

$0

$0

Additional child tax credit

-

$0

$0

$0

Making-work-pay tax credit

-

--

--

$800

Tax liability

=

$7,235

$5,383

$4,583

Table 7

Typical Tax Return: Single Individual, Above-Average Income

Filing Status

Single

Children

0

Income

$60,000

 

Pre-Bush

Bush

Obama

Itemized deductions (a)

-

$10,800

$10,800

$10,800

Personal exemptions

-

$3,700

$3,700

$3,700

Taxable income

=

$45,500

$45,500

$45,500

Tax on taxable income

 

$8,236

$7,484

$7,484

Making-work-pay tax credit

-

-

-

$400

Tax liability

=

$8,236

$7,484

$7,084

Table 8

Typical Tax Return: Single Individual, High Income

Filing Status

Single

Children

0

Income

$150,000

Pre-Bush

Bush

Obama

Itemized deductions (a)

-

$27,000

$27,000

$27,000

Personal exemptions

-

$3,700

$3,700

$3,700

Taxable income

=

$119,300

$119,300

$119,300

Tax on taxable income

 

$29,962

$26,996

$26,996

Making-work-pay tax credit

-

-

-

$0

Tax liability

=

$29,962

$26,996

$26,996

Table 9

Typical Tax Return: Family of 4, Two Earners, Upper-Middle Income

Filing Status

Joint

Children

2

Income

$150,000

 

Pre-Bush

Bush

Obama

Itemized deductions (a)

-

$27,000

$27,000

$27,000

Personal exemptions

-

$14,800

$14,800

$14,800

Taxable income

=

$108,200

$108,200

$108,200

Tax on taxable income

 

$22,776

$19,268

$19,268

Alternative minimum tax

+

$0

$0

$0

Child credit (non-refundable portion)

-

$0

$0

$0

Making-work-pay tax credit

-

$0

$0

$800

Tax liability

=

$22,776

$19,268

$18,468

Table 10

Typical Tax Return: Family of Four, High Income

Filing Status

Joint

Children

2

Income

$300,000

 

Pre-Bush

Bush

Obama

Itemized deductions (a)

-

$50,105

$54,000

$52,637

Personal exemptions (b)

-

$9,472

$14,800

$9,176

Taxable income

=

$240,424

$231,200

$238,188

Tax on taxable income (c)

 

$64,181

$53,663

$59,136

Alternative minimum tax

+

$0

$7,629

$6,151 *

Making-work-pay tax credit

-

$0

$0

$0

Tax liability

=

$64,181

$61,292

$65,287 *

Table 11

Typical Tax Return: Married Couple, Two Earners, High Income

Filing Status

Joint

Children

0

Income

$500,000

 

Pre-Bush

Bush

Obama

Itemized deductions (a)

-

$80,104

$90,000

82,636

Personal exemptions (b)

-

$0

$7,400

$0

Taxable income

=

$419,895

$402,600

417,363

Tax on taxable income (c)

 

$130,210

$110,667

130,342

Alternative minimum tax

+

$0

$13,233

$0

Making-work-pay tax credit

-

$0

$0

$0

Tax liability

=

$130,210

$123,900

$130,342

Table 12

Typical Tax Return: Married Couple, Two Earners, Very High Income

Filing Status

Joint

Children

0

Income

$1,000,000

 

Pre-Bush

Bush

Obama

Itemized deductions (a)

-

$155,105

$180,000

$157,637

Personal exemptions (b)

-

$0

$7,400

$0

Taxable income

=

$844,896

$812,600

$842,364

Tax on taxable income (c)

 

$298,510

$254,167

$307,342

Alternative minimum tax

+

$0

$0

$0

Tax liability

=

$298,510

$254,167

$307,342

Notes

(a) Taxpayers are assumed to have itemized deductions worth 18% of income. Itemized deductions are claimed when this amount is greater than the standard deduction. Itemized deductions are split evenly between the deduction for state and local taxes and the mortgage interest deduction. The phase-out of itemized deductions for high-income filers, the so-called "Pease" provision, is in full effect under Pre-Bush law and under Obama's proposed budget, although Obama increases the income thresholds where Pease begins to take effect. As part of the 2001/2003 tax cuts, President Bush temporarily eliminated the Pease provision, allowing high-income taxpayers to deduct the full value of their itemized deductions. The amounts listed for itemized deductions represent itemized deductions after any applicable limitation under Pease.

(b) The personal exemption phase-out (PEP) for high-income filers is in full effect under Pre-Bush law and under Obama's proposed budget, although Obama changes the income thresholds where PEP begins to take effect. President Bush temporarily eliminated the PEP provision, allowing high-income taxpayers to deduct the full value of their personal exemptions.

(c) Includes Obama's proposal to limit the value of all itemized deductions by limiting the tax value of those deduction to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% tax brackets.

* Corrected on 7/20/2010

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