What are “the Bush tax cuts” ?
In 2001, the Congress passed and the President signed into law a wide range of tax provisions affecting individual income tax rates, tax rates on shareholder dividends, capital gains tax rates, and the per-person exemption from the federal estate tax. These tax provisions have come to be known as “the Bush tax cuts.”
What did the Bush tax cuts do to federal income tax rates?
In 2001, the maximum federal income tax rate was 39.6 percent. Under the Bush tax cuts, the maximum rate was reduced to 35 percent.
What did the Bush tax cuts do to the tax on shareholder dividends?
In 2001, the dividends were taxed as part of a person’s income and could have been taxed at a rate as high as 39.6 percent. Under the Bush tax cuts, the maximum rate on shareholder dividends was reduced to 15 percent.
What did the Bush tax cuts do to the federal capital gains tax?
In 2001, the maximum federal income tax rate on the sale of capital assets, such as stock market investments, was 20 percent. Under the Bush tax cuts, the maximum rate was reduced to 15 percent.
What did the Bush tax cuts do to the federal estate tax?
In 2001, each person had a $1.0 million exemption from the federal estate tax, which could be used during life or at death. A married couple who planned properly could pass $2.0 million to the next generation free of estate tax. Once the tax applied to a decedent’s estate, it began at a rate of about 37 percent and went as high as 55 percent for very large estates. Under the Bush tax cuts, the per-person exemption rose from $1.0 million to $1.5 million (2004), then to 2.0 million (2006), then to 3.5 million (2009). In 2010, the estate tax has been completely eliminated for persons dying in this calendar year.
Why do the Bush tax cuts automatically expire on January 1, 2011 ?
It has to do with the rules of the Senate, particularly the Byrd Rule. Budget legislation cannot be fillibustered during the “reconciliation” process, but if a tax cut is proposed during the reconciliation process, it needs at least 60 votes to be a permanent tax cut. Otherwise, it must sunset after 10 years. The Bush tax cuts passed with less than 60 votes during the reconciliation process in 2001. Thus, on January 1, 2011, the tax laws as they existed on 2001 will automatically become, once again, the law of the land.
Will there really be only a $1.0 million per-person estate tax exemption in 2011 and in future years?
Unless Congress passes and the President signs a new law, the $1.0 million exemption will return on January 1, 2011. I think it is very unlikely this President and this Congress (or the next Congress) will be able to agree on any changes.