Yes, its true that the Obama tax cuts will reduce income tax rates and Alternative Minimum Tax (AMT). It will also provide tax relief by reducing employee-paid payroll taxes. It’s called the Payroll Tax Holiday.

The Payroll Tax Holiday provides tax relief by reducing the amount of Social Security tax employees pay on wages earned and self-employed individuals pay on all of their self-employment income (up to $106,800) by 2%. Under current law, employees pay a 6.2 percent tax and the self-employed 12.4 percent.

This tax holiday is only temporary however; it provides tax relief for one year. This means that during 2011, employees will pay only 4.2% on wages and self-employed individuals will pay only 10.4% on income in Social Security tax.

So, everyone should be happy, right? Not so fast!

Progressive advocates and many Democrats are concerned that the payroll tax cut will pose a threat to Social Security. Not because they don’t want workers to have extra cash in their pocket, but because they worry the temporary payroll tax rate will become the norm and leave Social Security competing with other programs for funding – and threatening Social Security benefits.

However, several top Republicans maintain they’re not interested in extending the payroll tax cut. Their “gut feeling” is the tax will be allowed to expire as planned.

Although the tax cut is only 2%, it represents a significant tax reduction of 32 percent. For instance, a worker currently earning $100,000 will pay $6,200 in payroll taxes in 2010, and $4,200 in 2011.

Good, tax relief for the working man, right? Nevertheless, consider…

The Congressional Budget Office estimates the cut will reduce federal revenues by $112 billion over the next two years. Because the tax package is not offset by changes elsewhere in the budget, the government will have to borrow to fill that hole in the Social Security trust fund.

Not so good, no relief for our national debt.

Sources: democrats.senate.gov, thehill.com, democraticunderground.com

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

Taxpayers have a little more than a month to take advantage of the special 2010 opportunities for saving taxes with Roth Individual Retirement Accounts.

That’s because 2010 delivers special benefits to people who convert their IRAs into Roth IRAs.

Starting in 2010, all taxpayers, regardless of their income level, are allowed to move money from a traditional IRA to a Roth IRA. Before 2010, only people earning less than $100,000 could do that. Beware, the benefit expires at the end of this year, but many believe it will be extended along with a large portion of Bush tax cuts.

But another key benefit is now starting to make the Roth conversion seem even more attractive: That’s the one-time-only offer, good in 2010, to convert from a traditional IRA to a Roth and then spread the resulting tax burden over 2011 and 2012. As many Washington insiders expect income tax rates to remain the same for the next year or so, converts can take advantage by locking in relatively low tax rates on conversions and still defer the tax burden for a year or two.
More on Year-End Tax Tips: Saving Taxes With A Roth IRA