Bush Tax Cuts Calculator Documentation

Overview

This calculator estimates a given taxpayer's federal individual income tax liability for tax year 2011 under four scenarios: (1) all of the Bush tax cuts are allowed to expire; (2) Bush tax cuts are fully extended; (3) President Obama's tax proposals as laid out in his F.Y. 2011 budget are enacted; and (4) proposal recently submitted by congressional Democrats to the Joint Committee for Taxation for scoring that was featured in numerous media stories during the week of August 9.

The calculator was developed by Nicholas Kasprak with assistance provided by Gerald Prante and Mark Robyn. The original version of the calculator was released in late July and on August 18, the fourth policy scenario above was added to the calculator.

The calculator has many assumptions imbedded in it in order to make the calculator simple for use by ordinary citizens. In all reality and unfortunately, the tax code is even more complicated than this calculator would lead one to believe. With calculators like this one for public consumption, there is always a trade-off between simplicity for ease of use by the general public and accuracy for those who want a very detailed and accurate estimate. In building the calculator in its current format (most notably with the "catch all"/"other income category), we sought to strike the right balance between these competing desires (simplicity for average users and accuracy for those with more detailed knowledge of the tax code).

Assumptions

The calculator assumes that under all four scenarios, the most popular tax provisions not in the Bush tax cuts that are typically extended every year by Congress (i.e., AMT patch, standard deduction for property taxes, above-the-line deduction for tuition and fees) are extended. Parameters have been adjusted for expected inflation per the IRS method for adjusting tax parameters for annual changes in the monthly CPI average. (Inflation projections for CPI-U out through September 2010 were required). These may differ slightly with the projections of CBO, JCT, or the Tax Policy Center.

For a complete list of the assumed parameter amounts and tax parameters under all four states of the world, click here. (Note: Although this page says "no AMT patch" under the Bush tax cuts expire and Bush tax cuts extended scenarios, the calculator assumes the same patch under all four scenarios.)

The "congressional Democrats" proposal assumes extension of all the Bush tax cuts with four major differences: (1) Ordinary income tax rates revert back to pre-Bush tax cut levels for top two marginal tax rate brackets, (2) tax rates for dividends and capital gains are 20 percent for top two marginal tax rate brackets, (3) limitations on itemized deductions (Pease) and personal exemptions (PEP) imposed on high-income taxpayers are reinstated, and (4) income thresholds for the second tax bracket (from the top) and the PEP/Pease thresholds are adjusted so as to prevent taxpayers with AGI less than $250,000 (married) or $200,000 (single) from having tax cuts expire.

The assumed policies under President Obama's proposals were outlined in his F.Y. 2011 budget. Note that the chances of that exact policy scenario actually being implemented are small, especially given Congress's hesitation to touch the 28% limitation on itemized deductions that Obama proposed in last year's budget. Details for the tax plans outlined in Obama's budget scenario were taken from both the Treasury Green Book and JCT's description of the proposals. JCT describes one particularly complex scenario: when a filer's taxable income is in the phase-out range of the AMT exemption, it can trigger both the AMT and the 28 percent limitation. This could affect families making less than $250,000, which is the reason some families under that Obama threshold could see a small tax increase as a result of his proposal. We understand that this interaction between AMT and Obama's 28 percent itemization rule is highly technical and may be the source of some confusion among calculator users.

This calculator does not include any of the provisions that were passed in the Patient Protection and Affordable Care Act (i.e., health care reform bill) that was passed in 2010. That's because none of the major individual income tax provisions in that bill go into effect until after 2011.

Note also that in most cases for working families, the reason that an income tax bill is lower under Pres. Obama than under the Bush tax cuts extended scenario is the president's proposal to extend his Making Work Pay tax credit through tax year 2011. (His budget calls for it to only be extended to 2011 and not beyond that, citing it as a "temporary recovery measure.")

In order to avoid a long list of questions pertaining to college expenses and students, this calculator makes simple assumptions regarding the tuition tax breaks a family receives, such as each student paying the same tuition in families with multiple college students.

Also for simplicity, the calculator assumes no capital gains in excess of 5 years for the "Bush expire" scenario. Under current law for 2011, capital gains on the sale of stock are set to go back to a system of three different tax rates for three different holding periods (less than 1 year, 1-5 years, and 5+ years).

This calculator ignores the "above-the-line" deduction for one-half of self-employment tax paid, which means those with self-employment income seeking a more accurate estimate should manually calculate one-half of the self-employment tax and enter it as a negative number in the "other income" category. The same principle applies to all other adjustments (i.e., "above-the-line" deductions) except for the tuition and fees deduction, which is calculated by this calculator based upon the tuition expenses amount.

Generally, one-half of self-employment tax for 2011 = ((self-employment income * .9235) *.0145) +  ((self-employment income * .9235) * .062) for those with wages + self-employment income less than $108,900. For those with wages + self-employment income greater than or equal to $108,900, one-half of self-employment tax for 2011 = ((self-employment income * .9235) *.0145) +  ((min(self-employment income, 108,900) * .9235) * .062).

Note: $108,900 is our projection for the Social Security wage cap for 2011.

Disclaimer

This calculator should not be used for calculating one's own official income tax. No information entered into the tax calculator is stored in any way. If you find any odd results in the calculator that you feel may be incorrect, please e-mail the Tax Foundation immediately: TF@taxfoundation.org.

Note that the Tax Foundation is not a place that gives personalized tax consulting. Please see a tax lawyer or accountant for that.

Calculator is the property of the Tax Foundation. Click here for more legal information pertaining to the calculator.