Our leaders in Washington are working hard on a tax relief compromise that will extend the Bush-era tax cut packages enacted in 2001 and 2003.

A summary of the Obama-GOP tax deal, released by the Senate, is now pending on the Senate floor. The tax cut compromise summary, obtained from the Senate Democrats website, calls for temporary tax relief in the following areas:

• Temporary Extension of Tax Relief
• Temporary Individual Alternative Minimum Tax (AMT) relief
• Temporary Estate Tax Relief
• Temporary Extension of Investment Incentives
• Temporary Extension of Unemployment Insurance
• Temporary Payroll Tax Holiday
• Temporary Extension of Certain Expiring Provisions

Here is the summary of the Obama-GOP tax cuts compromise:

Tax Cuts Compromise Package Summary
December 9, 2010

I. Temporary Extension of Tax Relief

Two major bills enacting tax cuts for individuals expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The following package extends these provisions from EGTRRA and JGTRRA for an additional two years, through 2012, and will provide important tax relief to American taxpayers. The following package also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act.

More on The Obama–GOP Tax Relief Compromise

There’s good news for American taxpayers and bad news for the President and Democrats. Today, the President announced a tentative deal with the Republicans in Congress to extend the Bush era tax cuts at all income levels for two years. In return, the President secured Republican approval to keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy.

The tentative agreement highlights the chaos and strains that Mr. Obama faces in his own party as he plots a course between his desire to get things done and retreating on his own principles.

“It’s not perfect, but this compromise is an essential step on the road to recovery,” Mr. Obama said. “It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs, and add momentum that our economy badly needs.”

The package would cost about $900 billion over the next two years, to be financed entirely by adding to the national debt, at a time when both parties are professing a desire to begin addressing the nation’s long-term fiscal imbalances.

The tentative deal would include the:

• Reduction of the 6.2 percent Social Security payroll tax on all wage earners by two percentage points for one year
• Continuation of a college-tuition tax credit for some families
• Expansion of the earned-income tax credit
• Provision to allow businesses to write off the cost of certain equipment purchases
• Top rate of 15 percent on capital gains and dividends would remain in place for two years
• Alternative minimum tax would be adjusted so that as many as 21 million households would not be hit by it
• Provision for a 13-month extension of jobless aid for the long-term unemployed

Perhaps the biggest concession by the President to the Republicans was on estate taxes. Mr. Obama agreed to a deal on the federal estate tax that allows an exemption of $5 million per person and a maximum rate of 35 percent. — a higher exemption and far lower rate than many Democrats wanted.

“The House Democrats have not signed off on any deal,” Representative Chris Van Hollen of Maryland, who has been representing House Democrats in formal negotiations on the tax issue, said Monday night. “We will thoroughly review and discuss the proposed package in the caucus.”

Some senior Democrats said an agreement by Mr. Obama to accede to Republican demands on the estate tax could lead to a revolt among lawmakers. Mr. Obama noted that he, too, still strongly disagreed with the Republican insistence on extending the tax breaks for the highest earners. “Ever since I started running for this office, I’ve said that we should only extend the tax cuts for the middle class,” he said, acknowledging that he had been thwarted in one of the chief goals of his presidency.

These major concessions by the President are substantial. They mark the beginning of a new trend – marked infighting between Obama and Democrats, increased compromise with Republicans on issues and less support by the American public.

And it’ll get worse. In January, the Republicans gain control of the House.

All politics aside, most Americans believe the extension of the Bush era tax cuts is essential to economy recovery – if just for the psychological lift it represents.

Source: nytimes.com

Many taxpayers had difficult financial times in 2009. If you are one of the millions of Americans who lost your job, received unemployment compensation, received less income, searched for a job, closed your own business, withdrew money from your IRA or had a drop in value in your 401(k), they may be a tax impact on your federal income tax filing.

Here is a quick summary of “What If” scenarios and the possible tax impact on your federal income tax filing:

What if I lose my job?
The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-related tax issues.
Publication 4128, Tax Impact of Job Loss.

What if I receive unemployment compensation?
Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.
See Publication 525, Taxable and Nontaxable Income.

Note: The American Recovery and Reinvestment Act temporarily will change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on those tax returns filed in 2010.

What If Your Income Declines?
There are many tax credits that are subject to income limitations. If you had a reduction in income this year you may be eligible for some credits or deductions. For example, the Earned Income Tax Credit is available for working families and individuals. Eligibility is determined by income and family size. You must file an income tax return in order to claim EITC.
Here is more info on the EITC.

What if I am searching for a job?
You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. Expenses may include travel, resume and outplacement agency fees. For more information, see Publication 529, Miscellaneous Deductions . Moving costs for a new job at least 50 miles away from your home may also be deductible.

What if my employer goes out of business or in bankruptcy?
Your employer must provide you with a Form W-2 showing your wages and withholdings for the year by Jan. 31 of the following year. For example, if you were employed during 2009, your employer should provide you with a W-2 for 2009 by Jan. 31, 2010. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and we can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA. For more information, see Starting, Operating or Closing a Business.

What if I withdraw money from my IRA?
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see Publication 590, Individual Retirement Accounts.

What if my 401(k) drops in value?
Generally, you can not claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see Publication 575, Pension and Annuity Income.

If you believe you may have trouble paying your tax bill contact the IRS immediately. There are steps you can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.

source: irs.gov