Tax cut deal: 51 million will take home less

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.

• Email
• Print
• Comment

Congress, Obama and your money

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)

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.