Will Obama’s Middle Class Tax Cuts Impact You?
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Source: WIkipedia
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.
Automatic IRA’s:
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.
Your Thoughts?
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.
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32 Comments so far
leave a commentI certainly hope it does not ‘impact’ me!
This is definitely a step in the right direction. With all the various handouts given to these big banks and auto industries, Main Street could use the tax cuts. However, as it was noted, it has yet to be passed.
Is the student loan forgiveness for public servants for real. That is awesome.
Wait — why would people who go into unionized government jobs get a better deal on their student loans than people who work in the private (productive) side of the economy?
More like a lower middle class tax cut. Particular for those of us living in a high-expense area, this doesn’t help at all.
“Here’s a breakdown of SOME of the proposed changes that may impact you. ” Maybe try reading the whole thing? And of course, there will be people that will hate this president/administration whether he helps you or not. That’s just the crap truth of our political rings now.
When are Americans going to realize that taxes in their current form are just a way to manipulate individuals and industries? Let’s think about this. Gov’t gives tax break to individuals to encourage investing, investments lead to rise in the stock market (not an improvement in the economy), government looks good, citizens think they have been given a deal. One problem, if the reason a person makes an investment is a tax break, that is the wrong reason! How about making an investment because the company is well run, creates profits and a return to the investor! What a concept.
By the way, think they may be trying to buy votes?
It won’t matter at all because the middle class will not be working. Most “people” making over $250,000 are small businesses and they will not be hiring. Think about it people, why would you want to penalize the rich? Have you ever worked for a poor man?
This is false. An S-corp business does not have an income so the profits pass through to the shareholders as income. Ergo, it *is* personal income. Saying otherwise is just spin.
If you don’t want the pass-through income, change your business to a C-corp and make yourself an employee with a salary.
@drklassen
you obviously don’t have a good understanding of the tax code. reincorporating to a c-corp will subject the owner to double taxation. the profits to the c corp would be taxed and then you’d be taxed again if you gave out a salary at the individual level. while salaries may be deductible to the corporation, you assume that the person’s salary would equal the sum of the corporation’s profits, which is not a reasonable assumption.
jon’s premise is correct, people don’t work for poor people, except for odd jobs here and there.
i’m not a fan of obama nor am i fan of bush. i can’t wait till the economy contracts with all of the new taxes on the “rich.”
This really isn’t that helpful although a decent step. What’s up with the proposed increase in capital gains tax? I thought he said he wanted to bring it down? I know it’s only for the “wealthy” but that really helps move investment money and for a general contractor, the more home investments the better off we are.
Why did you delete my post? I said nothing divisive or abusive. I simply stated why I don’t think this is a good idea.
Is he serious…I completely agree with John, this is definitely a lower middle class tax cut. Has he not heard of the east coast? I’m not talking about someone living in the midwest when making 100k is huge money. 100k for a couple in New England is like making 60k in Nebraska.
Democrats screw the rich and Republicans screw the poor. This idea that someone who makes $100-$150K per year living in NYC, San Francisco or any other major metropolitan city is considered too rich and not middle class by the democrats is idiotic. It’s OK not to give us tax cuts but don’t lump us with people making $500K or above who are very well off and increase taxes on us. Sorry…a bit of a rant since this article doesn’t get into that.
A couple at 85K? Thats not a lot of money.
This is social engineering at its finest and in large part the thing that got us all into this housing meltdown.
It never works like they think it will…..unless you count the guarenteed vote from those getting the handouts next cycle.
The way I read it, a family making more than $115,000 combined is not considered middle class for the child tax credit??? I’m sure those that fall in the $115,000 – $150,000 range with dependents certainly don’t feel rich.
The public service tax credit has been on the books for some time, so that isn’t new, but the expansion of forgiveness with 20 years of payments otherwise is new as far as I am aware. As a young lawyer who works in the public interest, the repayment plan for public interest workers wasn’t feasible as it would have nearly doubled my payments. It was not something I could afford. Nor is working in public interest for the next 7 years. As a result, I opted for the graduated plan. Either way, I am interested in the 20 year forgiveness option. That may be feasible.
However, real stimulus for student loans would come from forgiveness of student loan debt entirely. After wasting $700 billion on the banks, why not spend a modest amount of that and help those of us on the ground. That extra $1000 per month could mean a new car (helping Detroit), a new condo/house (helping the real estate market), or further investment in other investment vehicles (i.e. boosting Wall Street), and effectively bail out all of the struggling industries in one action. The best part, it wouldn’t cost $700 billion, the net forgiveness would be taxable though necessarily amortized over 15 or so years, so the government would get back its investment. In addition, think of the boost for lenders like Sallie Mae and private lenders like Citibank, Key Bank, etc.
For some reason, economic policy in Washington is being driven by Wall Street and not benefiting Main Street. This is quixotic since the economy is born on the backs of those of us on Main Street. Put money in my pocket, and every other American’s pocket and all of those ailing sectors of the economy would no doubt benefit. After all, a sale driven economy requires buying power, but supporting those at the end of the chain only serves to weaken the purchasing power of the consumer base.
i agree with you, but what makes you think this will be retroactive? i haven’t read that anywhere and i’d be surprised if it is. i mean, is the govt really going to swallow all the loans of persons after 20 years? i’m pretty sure there is some sort of contract clause in the constitution that prevents this.
with globalization, the only thing that will keep us competitive is education. i think it’s terrible policy to have income phase out limits on student loan interest. i just don’t understand why we would want to penalize persons who are smart from taking high paying positions. backwards policy if you ask me.
Automatic IRA a joke. Anyone can open an IRA and contribute so long as they are under certain income thresholds, automatic investment via bank transfer is commonplace. This basically says that people are so stupid they won’t save unless their employer tells them they should. People of this stupidity level typically aren’t interested in retirement savings, especially if it is all out of their own pocket.
Retirement savings credit – the people that qualify for this are hardly able to ever afford to make an IRA contribution of any significant to benefit from this, let alone people who would qualify for it to be refundable…
Also, if someone can explain to me how these two things help influence the economic recovery in the short term I would love to find out. We’re trying to drive consumption and job growth (even though savings is a wise choice) in order to get out of the recession.
Absolutely useless for those who busted their humps over the past couple decades to provide for their families. A household income of 85k in any metro area is barely considered middle class. I’m sure in the middle of nowhere 85k is a great income, if its possible to earn that. In the city, its just making it.
The additional child tax credit will be nice. I won’t complain about an additional $1000. I don’t understand what you mean about non-refundable though. The current tax credit adds $1,200 to my refund, no matter what it currently is. Are you saying if I am taking large deductions to already receive a refund, suddenly I can no longer take the tax credit? That seems kind of silly.
I’m with John. I find it difficult to believe that a couple making between 65,000 and 85,000 is only partially middle class, and that a couple making 85,000, especially with kids, can, in any sense, be considered upper class. That kind of income won’t get you a loan on a doghouse in San Francisco.
Family of 4 making just shy of 60k a year in the midwest. We lost our home last year (due in large part to outrageous medical bills…chronic non-curable illness is awesome!) and now we find out that our home is being bought, fixed up and resold by a grant from the federal government to the local government. So not only did we lose our home, credit rating and dignity, we get to pay for it with our tax money…again. This of course is after so much tax money went to bailout the company that foreclosed on us. Of course we made too much money for anything the government was doing (and the banks don’t HAVE to cooperate with their programs anyway) but yet we continue to fund these same banks over and over again.
To top that off, due to ridiculous partisanship nothing will be done to help folks with healthcare either (those that do work but end up getting sick.) Not asking for the public option (I do NOT want Obamacare as envisioned and no, I am not a town hall nutjob either) but in the end, nothing will be done to actually help anyone out here on the ground.
We need a complete boot on both sides of the aisle.
while i don’t agree with you on obamacare, and i do sympathize for you and yours, we do agree on one thing. lets boot booth sides of the aisle.
The educational loan program is not new, just a new percentage. It is called Income Based Repayment (IBR). I believe it was new in 2009. You currently pay 15% of your income that is above the poverty level. The new program would be a lower 10%. The other benefit of complete loan forgiveness at 10 years for public service is already available. There are some “bugs” that may need to be worked out. I believe if your spouse also has loans you might be better off filing separately (this may change in the future). Also right now when the government does pay off your loans at 10 years, I believe that counts as income, and you are taxed on that.
Just do a search for IBR. I am surprised more are not familiar with this.
When will single people without kids and who are working hard to save 20% before they actually buy a house get a tax credit? We do not get any tax deductions except for what we donate to charity. I am essentially paying for more for my neighbor’s kids to go to school then they are paying for their own kids to go to school with taxes. Although, I prefer to think that I am just paying back society for my own past schooling. I am sure we are the ones paying for all these free house down payments, car down payments, appliances, etc. Plus, we are the ones that will be paying for all of this in the future and will not be able to retire at 65 like a lot of people can now as we have to fund our own retirements with our own money in 401ks. The hand-outs to everyone needs to stop and instead people need to earn their money and pay taxes to get this country out of debt. The single people who work and do not homes and do not kids are essentially being penalized.
There are multiple points that are interesting in this discussion, but the most concerning is the concept of public servant.
The impression portrayed is, if you work for the government you do not have to worry about debt.
The statements made in the state of the union and the points in this article cause a slippery slope, that with an excellent education hope to prevent.
Also, the income levels are very, very, very generic.. the limit imposes in some areas are considered “rich”, while in some areas are considered poor.
Geographic income limits are more appropriate.
Providing “benefits” to one group always impacts another group.. “spreading the wealth” does not fix the problem, it just moves the problem to another area.
Tax code. Just a means to manipulate and steer the masses in the direction that enhances the position of the political and corporate elite.
So…. how is he going to cut the deficit in half? Tax cuts? It doesn’t work like that. Yeah, it’s a recession, and yeah, we could all use breaks, but we’re not going to get out of this whole by spending more money.
No, these tax cuts will not help me a bit.
It’s a more or less meaningless cut that would pander to PO’s base, but provide no significant impact on the economy. Sort of like rearranging the deck chairs on the Titanic.
What would help the economy would be to renew the Bush tax cuts and halt all initiatives such as health care reform and “cap and trade” which are causing businesses to freeze expansion.
Virtually every tax payer will see an increase in taxes when the Bush cuts are allowed the expire.
Businesses will not expand until they have some confidence in their future costs and have confidence in the economic recovery – neither of which they have now.
Our budget process doesn’t work; let’s try something else.
Nothing has alarmed me more recently than reading the details of the Obama budget in the New York Times which projects a deficit that will grow to 11 percent of our total economic output in 2011. Additionally, the budget projections suggest deficits will NOT return to sustainable levels over the next ten years, but by 2019 are expected to rise sharply to more than 5 percent of the gross domestic product. This outlook, following the Republican administration’s spending spree in the latter years of their term without any efforts to pay for those increases, is a severe indictment of our political leaders.
It is no exaggeration to say this puts our national security at risk, erodes our leadership position in the world and threatens our standard of living.
The government uses a traditional budgeting process, albeit much more complicated than business. Essentially, it’s a bottom up approach where all departments and agencies of government build their budgets and submit them to the White House for approval. Then it’s up to the President to make whatever adjustments he feels are appropriate, influenced largely by political considerations. When the budget goes to congress for approval, local and regional interests take over and the numbers are tweaked unsparingly.
In essence, the hot button political issues in a given year are the areas that get the funding increases without regard to providing for the out years. For example, the country’s infrastructure has been ignored for years and continues to deteriorate although the President has made this one of his many priorities.
The country’s situation is serious and calls for a fundamental change in the way the government budgets. Without knowledge of the constitutional or legal issues involved, I would like to see a top down budget process where the public takes a one time, binding vote to set the country’s budget number and budget deficit ceiling for 2011. The 2011 budget number could not be less than the 2010 budget.
Economists say budget deficits should not consistently exceed 3 percent. However, the administration’s budget projections call for 3.6 percent each year for the next 10 years. The public vote would bind the administration and congress to reduce the deficit below 3 percent by the end of 2013 and three years after that, reduce it further to 2.5 percent. Thereafter, future administrations would be bound to deficits of no more than 2.5 percent. The only program exempt from the resulting cuts would be National Security which should include NASA.
For example, in 2011 the National Security budget is approximately $782 billion and Iran threatens the Persian Gulf prompting the United States to take action to forestall their aggression at a cost of $100 billion. When the administration prepares the 2012 National Security budget, it would use the $782 billion figure for the 2011 deficit calculation rather than $882 billion.
If the politicians don’t have the will to take action and they fail to meet these financial accountability goals, there would be consequences. The voters would become engaged. If the deficit has not been reduced to less than 3 percent by the end of 2013, the Democrats would present a set of budget cutting options, as would the Republicans, and a public vote taken on which plan to adopt. If neither plan receives a majority vote, the parties would submit revised plans. The same process will be used again if the 2.5 percent deficit goal is not achieved by the end of 2016.
The top down approach means the administration and congress would be pressured to work together in finding a solution to the growth of entitlement programs and find common cause in ways to bring them under control. It also will weigh heavily on the administration to find better ways to grow the economy and create jobs to get the revenues that would enable them to meet their deficit reduction goals, legislate new programs or expand existing programs.
If and when an increase in the national debt became necessary, another public vote would be taken if the administration and congress have not met the deficit reduction goals. This will help refocus Washington politicians from spending on their favorite projects to rebuilding a strong financial engine that will restore our world leadership.
However, the greatest benefit of a top down budget approach is to put power back in the hands of the people. We gave them the power, so let’s take it back. Can it be done? Let’s ask the voters.