Tax cut deal: 51 million will take home less

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Despite a sweeping tax cut deal that is supposed to keep everyone whole financially, if not better off, 51 million households will face a higher tax bill or a lower refund compared with this year.

The main culprit: a new payroll tax break that will not be as generous for many low- and middle-income households as the tax cut it is replacing.

The tax legislation that President Obama signed into law on Friday, will for one year reduce workers' Social Security taxes. Workers pay 6.2% on their first $106,800 of wages. The tax cut deal will reduce that to 4.2%.

That payroll tax "holiday" will replace the Making Work Pay credit, which expires Dec. 31 and was part of the 2009 Recovery Act.

As a result, 51 million households -- about a third of the total -- will be out an average of $210 compared with this year, according to the nonpartisan Tax Policy Center.

"Nothing else in the compromise tax agreement compensates [them] for those losses," Tax Policy Center senior fellow Roberton Williams wrote in the blog Tax Vox.

About 45 million of the households represent private and public sector workers.

Here's why they won't get as much tax relief in 2011: Making Work Pay was worth $400 for individuals making $75,000 or less or $800 per couple making $150,000 or less.

To get that much under the payroll tax break, one will need to earn at least $20,000 ($40,000 for couples). That's because the payroll tax break will amount to 2% of a worker's pay.

The other 6 million households affected represent state and local government employees who received the Making Work Pay credit but won't qualify for the payroll tax holiday. Why? Because they're not covered by Social Security and therefore don't pay into the system. (Stimulus vs. debt: An analysis)

Still better off with deal than without

It's also true, however, that many low- and middle-income families will still be much better off under the compromise package than they would have been without it.

That is, if the Bush tax cuts expired along with a lot of stimulus provisions.

The White House offered this example: A single mother in Ohio with two young kids and a $16,900 income will keep the $420 that she's gotten from the Bush tax cuts. On top of that, she will receive another $1,720 in tax relief -- $340 from the payroll tax holiday plus $1,380 from an expanded child tax credit.

Meanwhile, an analysis from the liberal Center on Budget and Policy Priorities estimates the tax cut compromise as a whole will keep more than 2 million Americans above the poverty line and reduce the severity of poverty for 18 million more.

And an analysis by the Tax Foundation, a research group that favors lower taxes, found that low-income Americans will also be better off under the tax cut deal than they would have been under a bill passed by House Democrats.

That bill would have extended the Bush tax cuts for households making less than $250,000 but not replaced the expiring Making Work Pay credit. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,122.01 15.31 0.09%
Nasdaq 4,569.62 -1.02 -0.02%
S&P 500 2,000.12 0.10 0.00%
Treasuries 2.36 -0.03 -1.25%
Data as of 5:49pm ET
Company Price Change % Change
Bank of America Corp... 16.20 -0.13 -0.80%
Apple Inc 102.13 1.24 1.23%
Facebook Inc 74.63 -1.33 -1.75%
Yahoo! Inc 38.18 0.39 1.03%
Pfizer Inc 29.49 0.28 0.96%
Data as of 4:02pm ET

Sections

As Elon Musk cancels the latest launch of a SpaceX rocket, he's also got some "horrible nightmares" to contend with. More

Former Fed chief Ben Bernanke believes the 2008 financial crisis was the worst in global history, topping even the Great Depression. More

Tech fans are already excited about the launch of Apple's iPhone 6 next month. There's now a report suggesting that the iWatch could be coming too. Wall Street is pleased. More

Utah State professor Michael Glauser cycled 4,000 miles this summer, visiting 100 entrepreneurs across the country. Here's a snapshot of how they grew their businesses. More

Mary Fallon, from Durham, Maine, is a mother of three children, two dogs, 25 chickens and a flock of 22 sheep. Here are journal entries from a day in her life. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.