Factbox: Tax rates expiring in January 2011

Thu Nov 4, 2010 4:03pm EDT

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(Reuters) - President Barack Obama is open to talks with Republicans about extending all of the Bush-era tax rates, a spokesman said on Thursday, two days after his party suffered big losses in congressional elections.

Until now, Obama has argued fervently that the country could not afford extending lower tax rates enacted under former President George W. Bush for those with individual income above $200,000. The Bush-era tax rates are set to expire at the end of the year.

Republicans back renewing rates for the lower income groups, but also for those with individual income above $200,000 a year, which would benefit about 3 percent of taxpayers.

A sticking point could be the length of the extensions: Obama backs permanent extension of the middle-class cuts, but not permanent renewal for richer Americans.

A compromise on extending all of the Bush-era tax cuts would also include extension of lower rates on dividends and capital gains, now taxed at 15 percent.

Obama proposes to raise those taxes for high-earners to 20 percent in 2011, but if Congress fails to act before December 31, the rates for dividends for high earners jumps to 40 percent, a prospect worrying some companies and investors.

COST OF EXTENDING THE CUTS

* The debate over whether or not to extend the tax cuts will focus on the impact on the U.S. budget deficit, which hit 8.9 percent of GDP in the fiscal year that ended September 30.

* Extending all the 2001 and 2003 tax cuts would cost the federal Treasury $3.6 trillion over 10 years, while extending the middle-class tax cuts and allowing rates to rise on upper income brackets would cost $2.9 trillion, according to White House estimates.

IF CONGRESS FAILS TO ACT

* If Congress does nothing by December 31, and allows all the tax cuts to expire at the end of the year as scheduled, tax rates will rise in January for all income brackets.

* Current income tax rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent.

* Under current law, the 10 percent and 25 percent rates are dropped in January. Tax rates move to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent.

* The 33 percent tax rate would jump to 36 percent and the 35 percent rate would jump to 39.9 percent.

TAXES ON DIVIDENDS AND CAPITAL GAINS

* The top tax rate on long-term capital gains will rise to 20 percent in January from 15 percent currently if Congress does not act.

* Dividends, which are currently taxed at 15 percent, will be taxed at the same rates as ordinary income in January with a top rate of 39.9 percent.

* The healthcare overhaul passed earlier this year imposes a new 3.8 percent Medicare tax on dividends and capital gains for singles making more than $200,000 and couples making over

$250,000.

* When the Medicare tax goes into effect in 2013, the top tax rates on dividends will rise to 43.4 percent. The top rate on capital gains will rise to 23.8 percent.

PRESIDENT OBAMA'S PROPOSAL

* The 10 percent, 15 percent, 25 percent and 28 percent income tax rates would be made permanent.

* The 33 percent rate moves up to 36 percent and the 35 percent rate rises to 39.6 percent.

* The 28 percent tax rate income bracket would be widened to prevent individuals with $200,000 of income in 2011 from paying the 36 percent tax rate. A similar adjustment is made for families with gross incomes of $250,000.

* Obama has proposed a top tax rate of 20 percent for dividends and capital gains.

* The healthcare overhaul would bring those top tax rates to 23.8 percent in 2013.

Sources include Joint Tax Committee report on expiring tax provisions.

(Reporting by Donna Smith and Kim Dixon; Editing by Jackie Frank)

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