On Thursday, the Senate passed a new bill, already passed by the House, that extends reduced tax rates, changes the nature of the Alternative Minimum Tax (AMT), eliminates an extension to higher-education tuition deduction, and eliminates a special deduction for teachers who pay for supplies out of their own pockets.
The rich — those with over a million dollars of income each year that is generated by capital gains in taxable accounts, not earned income or gains in tax-deferred accounts — stand to win the most due to this bill.
Critics question the correlation between lower investment income rates and economic growth and say the reduced rates primarily benefit high-income taxpayers Ã¢â‚¬â€œ since exposure to stocks for middle- and upper-middle income taxpayers tends to be through tax-deferred vehicles like 401(k)s.
In order to make up for the tax that will not be received by the government due to these changes, there is also a provision that will allow anyone to transform a Traditional IRA to a Roth IRA, paying income taxes during the process, starting in 2010. Opponents believe that most will opt not to convert, but there’s always a chance the rules will change by then, and no one can accurately predict what tax rates will be.
The only step left is for the president to sign the bill.
|Income group||Saves||Reduces tax liability by:|
|Over $1 million||$42,766||4.5%|
Update: Here’s last night’s story about the tax cuts that aired on Marketplace.
Updated February 7, 2012 and originally published May 12, 2006.