In last week’s State of the Union address, President Obama announced proposed tax cuts and other programs aimed at easing the financial burden on the middle class. The proposed changes were the brainchild of the Middle Class Task Force (MCTF), chaired by Vice President Biden.
The MCTF released a fact sheet addressing some of the proposed middle class assistance. Here’s a breakdown of some of the proposed changes that may impact you.
The Saver’s Credit
The ‘Saver’s Credit’, also known as the Retirement Savings Contribution Credit, would be expanded and refundable. This change might have the broadest impact on middle class families overall, since it hits those without dependents.
Expansion: In its present state, the Savers Credit ranges from 10 to 50 percent on the first $2,000 of contributions made to a 401(k), IRA, or other qualified retirement plan. The current income limit for receiving this credit is $55,500 for a married couple and the credit percentage fades out up to that limit.
The new proposal would allow couples making up to $65,000 a year get a full 50% credit on the first $1000 they each contribute for a maximum $500 credit per individual. Couples making up to $85,000 would now become eligible for a partial credit.
Refundable: The credit would be made refundable, meaning that those have no tax liability will get the additional credit added to their tax return versus a non-refundable credit, which only subtracts from your tax liability.
The Child & Dependent Care Tax Credit
The value of the tax credit nearly doubles, from 20 to 35%, for all families making under $85,000 a year. A family that makes between $85,000 and $115,000 would also see a tax credit increase. This means that a qualified family that claims the max amount of $6,000 in expenses will see a tax deduction of $2,100 instead of $1,200.
It may also force a strategic switch to claiming the Dependent Care Tax Credit instead of funding a dependent care flexible spending account, which has a maximum funding amount of $5,000.
Unlike the Savers Credit, the Child & Dependent Care Credit is non-refundable (meaning you won’t get a check from the government if you are already owed a refund).
This credit may be long overdue since it had only been increased once in the prior 28 years and is not indexed to inflation. Meanwhile, child care costs have increased at twice the rate of the median family income over the last decade.
Student Loan Payment Cap, Automatic IRA’s, Support for Elder Care
Obama’s middle class task force also proposed several other initiatives relating to student loans, automatic IRAs, and elder care.
Student Loan Caps:
Two big changes here: A student loan borrower’s payments would be limited to 10% of discretionary income above a standard living allowance. All remaining debt will be forgiven after 10 years of payments if in public service and 20 years otherwise.
78 million working Americans are not offered an employer based retirement plan. Under the change, all employers would have to offer a direct deposit IRA to employees, who could opt out, if they chose to. Contributions to the IRA would be voluntary and matched by the Savers Credit for eligible families.
Elder Care Support:
$102.5 million in additional funding will be available for counseling, training, respite care, and more to help families care for seniors in the home.
It remains to be seen whether these proposed changes will pass upcoming budget revisions. If they do and you fall into the ‘middle’ class, how would these proposed changes impact you and your family?
For more of GE Miller’s writing, visit 20somethingfinance.com, a personal finance blog geared towards young professionals.