Political discussion about this week's tax-cut compromise has focused on how much money the wealthy might save, yet if the deal is approved by both houses of Congress, you're bound to see more money in your wallet, whatever your income.
That's because the package provides a bonus, in addition to the widely anticipated extension of the Bush-era tax cuts. The surprise perk is a one-year reduction in Social Security payroll taxes.
Nearly every worker should take home more money starting in January. The deal also includes an extension of unemployment benefits through the end of 2011.
'If this package does indeed pass, it's going to make a significant difference over the coming year for middle-class taxpayers,' said Melissa Labant, a tax manager for the American Institute of Certified Public Accountants.
Economists expect the combination of maintaining current tax rates, reducing payroll taxes and boosting other tax benefits will induce consumers to spend more and investors to turn more bullish.
Here's a look at key elements of the compromise package.
The government takes 6.2 percent out of your paycheck, up to $106,800, for Social Security. That would drop to 4.2 percent in 2011, resulting in an immediate increase in take-home pay.
If you make $50,000 a year you will pay $1,000 less. If you get paid twice a month, you will have an extra $41.67 in your paycheck starting in January.
Anyone who makes more than $106,800 a year will receive the maximum savings of $2,136.
'That certainly provides an added level of dollars to do whatever people were planning on doing, whether that's saving or spending,' said Greg Rosica, a tax partner at Ernst & Young.
For the past 12 months, you didn't pay any taxes if a family member died. In 2011, the estate tax was supposed to be 55 percent of the value of an estate after the first $1 million. Now it will be 35 percent of an estate's value after the first $5 million.
Except for the temporary repeal of the estate tax this year, the rate has not been less than 45 percent since 1931.
Only about 3,500 estates will owe the estate tax in 2011 under the plan. That compares with roughly 7,000 under President Barack Obama's earlier proposal of a 45 percent tax on value exceeding $3.5 million.
Although that may not sound like a big difference, House Speaker Nancy Pelosi said the new estate tax proposal will add about $25 billion to the deficit.
Tuition tax credit
Families with kids in college can benefit from a tax credit for tuition and fees. A maximum of $2,500 will remain in place for two years. A credit reduces taxes owed, versus a deduction that reduces taxable income.
Parents familiar with 529 college savings plans may question what to prioritize. A 529 account encourages savings by enabling account holders to make tax-free withdrawals for eligible college expenses.
Parents should set aside $4,000 per year to maximize the tax credit before contributing to a 529 plan, said Mark Kantrowitz, a college financial aid expert and publisher of FinAid.org. That's because directly lowering their tax bill exceeds the financial benefit of tax-free distributions.
The proposed extension is welcome assistance, since the average annual cost of in-state, public, four-year schools rose to $7,605 this fall, and private college expenses increased to $27,293.
Child tax credit
There's more good news if you're a parent — the $1,000 child tax credit would be extended for two years. Taxpayers with income of less than $75,000, or $110,000 for married couples filing jointly, qualify for the full amount.
More than 21 million taxpayers would win a reprieve from the Alternative Minimum Tax for 2010 and 2011.
The AMT was enacted in 1969 to make sure wealthy people couldn't avoid taxes altogether, but it wasn't indexed for inflation. This means Congress has to raise the amount of income exempt from the AMT each year to spare millions from tax increases averaging about $3,900.
Had no adjustment been made, taxes would have gone up for individuals making as little as $33,750, and married couples making $45,000.
Similarly, a married couple making $85,000 a year with two college-age children would have had to pay $4,500 more in taxes, according to an analysis by The Tax Institute at H&R Block.
A married couple making $100,000 a year with two young children would have faced a tax increase of more than $6,100.
Capital gains, dividends
Current tax rates on long-term capital gains would remain in place for two years. The tax applies to profits from the sale of an asset, such as stock, held more than a year. The highest rate of 15 percent was expected to rise to 20 percent next year.
Investors also would benefit from an extension of the historically low tax rates on dividend income, which top out at 15 percent.
Had no action been taken, dividend payments would be taxed as regular income, which would raise the tax rate to as much as 39.6 percent for top earners. The extension means a savings of nearly a quarter on every dollar of dividend income for this group.
Individuals with dividends paid to taxable accounts can collectively expect to save nearly $75 billion over two years, according to an analysis by Standard & Poor's Howard Silverblatt.
Cliff Caplan, a financial planner and president of Neponset Valley Financial Partners in Norwood, Mass., said the extension of the lower tax rates could lift prices of dividend-paying stocks as they become more popular with investors, who would now avoid the higher tax rates for at least two more years.