Cutting Through the Hype: What You Really Need to Know About the Bush-era Tax Cuts

"Nothing is certain but death and taxes." Well, Mr. Franklin, that is no longer entirely true. With the impending expiration of the Bush-era tax cuts and a Congress full of “lame ducks,” taxpayers are anything but certain about whether they will be subject to tax rates not seen for nearly a decade.

As the sun begins to set on the 10-year Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), rampant political jockeying from both sides blur the essential elements of the issue. In an effort to provide clarity amidst the political fog, this article will outline: (1) what major provisions are set to expire, and (2) what alternatives or compromises are being proposed before the clock strikes midnight on January 1, 2011.

The Expiring Provisions

Unless President Obama and the members of Congress can reach a compromise in the next few weeks, the following list of major provisions affecting all taxpayers will expire at the end of this year.

Tax Rates

  • The 10% tax rate (the lowest tax bracket) will disappear and be replaced by a 15% rate.
  • The 25% rate will rise to 28%.
  • The 28% rate will rise to 31%.
  • The 33% rate will rise to 36%.
  • The 35% rate will rise to 39.6%.

Capital Gains and Qualified Dividend Rates

  • The long-term capital gains rate will rise from 15% to 20%.
  • The qualified dividends tax rate will rise from 15% to the ordinary wage tax rates of the filer (that is, a maximum of 39.6%).

The Child Tax Credit

  • The child tax credit will decrease from $1,000 to $500 and eligibility standards for such will become more stringent.

Estate Tax

  • The estate and gift tax will be restored:
    • the top estate and gift tax rate will be 55%; and
    • the estate and generation-skipping tax exemption will be limited to $1 million.

Marriage Penalty

  • The standard deduction for married couples filing jointly will no longer be twice that of a single filer; and
  • The 15% bracket for married couples filing jointly will no longer be twice that of a single filer.

Personal Exemptions and Itemized Deductions

  • The personal exemption phase-outs and “Pease limitations” will be restored, thereby eliminating many exemptions and deductions for high income taxpayers.

Section 179 Expense Limitation for Small Businesses

  • The Sec. 179 maximum deduction for the purchase of depreciable business assets will drop from $250,000 (reduced by the amount by which the cost of property placed in service during the 2010 taxable year exceeds $800,000) to $25,000 (reduced by the amount by which the cost of property placed in service during the 2011 taxable year exceeds $200,000).

The Alternative Proposals

In trying to stimulate the economy and reduce the country’s deficit, Congress and President Obama are torn between deciding whether extending tax cuts to encourage taxpayer spending is more effective than collecting higher taxes. One thing is certain, most Democrats and Republicans agree that allowing all of the Bush-era tax cuts to expire on December 31 would cause more harm than good, overall. As such, their main focus is extending the tax cuts for individual taxpayers whose income is below $200,000 (or $250,000 for joint tax filers), permanently (although nothing is ever permanent in taxes).

The main argument is whether the tax cuts should be extended for the top tax brackets. Many Republicans, like Minority Leader John Boehner (R-OH), insist on permanently extending the Bush-era tax cuts in their entirety and cutting spending elsewhere in order to reduce the deficit. Other Republicans say they would compromise on a two or three year extension of the rates for the top tax brackets. Senator Chuck Schumer (D-NY) proposes a compromise in which the tax cuts will extend to taxpayers whose income falls below $1 million. Democratic Senator Mark Warner (D-VA) proposes extending tax cuts for the lower tax brackets and using the $65 billion (that would be saved by not extending the tax rates for the higher brackets) to cut taxes for small businesses.

On December 6, President Obama announced his intent to extend the Bush-era tax cuts to all income levels despite the Democratic Party’s—and his own—opposition to such a plan. The proposed package includes a $5 million estate tax exemption and a maximum rate of 35%. Additionally, it would reduce the Social Security payroll tax for all wage earners by 2%. The marked concern, however, is the $900 billion price tag attached to the enactment of this plan. So while the fear of massive tax hikes is allayed, the national debt will continue grow. Still, as Republicans are ready to sign off on the deal, most Democrats continue to show their unwillingness to agree on any such proposal.


As it stands, taxpayers are left scratching their heads as the forthcoming expiration of the Bush-era tax cuts looms closer. Although the proposed plan may not be the most ideal situation given its steep cost and the increasing national debt, inaction can be equally, if not more, detrimental. Nevertheless, with interest rates still low, there are many planning ideas that will yield tax benefits irrespective of the outcome. Please consult your tax advisor for assistance with this challenging process.