The Bush 2001 and 2003 tax cuts were scheduled to expire on Jan. 1, 2011. If lawmakers did not act before the end of this year, all Americans would face higher taxes in 2011.

The question about what will happen to these tax cuts has finally been answered — they will not expire for another two years, said Eileen St. Pierre, Oklahoma State University Cooperative Extension personal finance specialist.

“In a compromise with Republicans, these extended tax cuts will affect everyone, not just those families making less than $250,000,” St. Pierre said. “In exchange, unemployment benefits will be extended for another 13 months and Republicans will not insist that the benefits’ $60 billion price tag be offset by cuts in federal spending.”

Income tax rates will stay the same for another two years.  The top two income brackets will remain at 33 percent and 35 percent, respectively.  There will be no changes in the taxation of dividends and capital gains.  Included in the legislation is another patch for the alternative minimum tax (AMT) that raises the AMT exemption amount to account for inflation. 

St. Pierre said that many workers may not have even noticed the Making Work Pay tax credit, which is expiring this year.  To replace this credit, the White House negotiated a one-year reduction in the Social Security payroll tax paid by employees from 6.2 percent to 4.2 percent.

“What this means is that for every $1,000 in income subject to the FICA tax, you will get to keep an additional $20.  If you make $50,000 a year, that’s $1,000.  The maximum amount of income subject to FICA tax is currently $108,600.  So the maximum amount a high wage earner can benefit by is $2,172,” she said. “The goal of this tax break is to give a jolt to the sluggish economic recovery on the assumption that everyone – the middle class and the truly wealthy – will go out and spend that extra money instead of saving it or paying down debt.”

There will be a major change in the estate tax over the next two years.  There was no estate tax in 2010, and it was scheduled to return in 2011 to a rate of 55 percent on estates worth more than $1 million. However, this legislation sets the estate tax for 2011 and 2012 at 35 percent for estates worth more than $5 million ($10 million for couples).

“We don’t know what will happen after 2012. It certainly will make for some interesting promises on the presidential campaign trail,” St. Pierre said.