Obama Proposes Middle-Class Tax Breaks

In his penultimate State of the Union address, President Barack Obama on Tuesday night announced wide-ranging proposals he said would improve the economic prospects of the middle class, including helping families pay for college and child care, while giving more workers access to retirement plans.

Obama addresses Congress as Boehner and Biden look on

Obama addresses Congress as Boehner and Biden look on

To help pay for these expanded benefits, the president also wants to increase the taxes paid on inherited assets of higher-income households.

Many agree that it’s a long shot the president will get his wish list — especially the tax hikes — through the new Republican Congress.

Even so, here are some highlights of the president’s proposals released in recent days:

Retirement. Obama is seeking to automatically enroll employees without a retirement plan at work into an IRA — a move potentially affecting 30 million workers. This auto-IRA would apply to employers with more than 10 employees. Workers could opt out. Employers with up to 100 workers could receive a tax credit for setting this up.

Companies with a retirement plan would be required to allow part-time employees to contribute if they have been working at least 500 hours a year for three years. Part-timers working less than 1,000 hours a year are usually excluded from such plans.

This proposal would go further than myRA, announced by Obama in last year’s address. MyRA, which stands for “my retirement account,” allows workers to invest in a Roth IRA through payroll deduction if their employer can directly deposit some of their pay into the account.

Paid sick leave. The president urged Congress to pass legislation that would allow every worker to earn seven days of paid sick leave. Currently, 43 million workers don’t have any paid sick leave. Meanwhile, Obama said he will take action to help states adopt their own sick leave laws.

Worker, parent and student credits. Obama is proposing a new $500 credit to help with costs incurred when both spouses work, such as commuting, along with child and elder care. A full or partial credit would be available to families with income of up to $210,000. About 24 million couples would qualify.

He would also expand the Earned Income Tax Credit so more low-income workers without children would qualify and receive double the current credit. To qualify for the credit this year, individuals without kids must earn less than $14,820 for a maximum credit of $503.

The maximum Child and Dependent Care Tax Credit would be tripled to $3,000 for each child under age 5. In addition, the income limit would be raised so more families supporting children, the elderly or disabled dependents would qualify for the maximum amount.

The American Opportunity Tax Credit would reach more students with more help. For instance, families would be able to claim a credit for up to $2,500 a year spent on tuition, fees and books for five years — instead of the usual four.

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Student debt. The president would eliminate income tax liability on student loan debt that’s been forgiven. Federal student loans have repayment plans that erase unpaid debt after a certain number of years, which currently could lead to a sizable tax bill.

All these tax breaks, however, are paid in part by tax increases on wealthier households.

The president wants to raise the maximum rate on capital gains and dividends to 28 percent — the same level as during the Reagan administration. Currently, the top rate is 20 percent. (Some high-end households also pay a 3.8 percent surtax on investment income.)

And the president proposes eliminating the so-called stepped-up basis on inherited assets. Say, your grandfather’s original purchase price of a share of stock — the basis — was $100 and over many decades that investment grew to $10,000. If he sold the stock, he would have to pay a capital gains tax on the $9,900 profit.

Instead, if he held onto the stock, at his death the basis would be updated or stepped up to reflect the current stock price — $10,000. As his heir, you could immediately turn around and sell the stock for $10,000 without triggering any capital gains tax. The White House says hundreds of billions in capital gains go untaxed each year because of this stepped-up basis loophole.

The president wants to close it, although his proposal lacks many details so it’s unclear how this would work. Tax experts say their understanding now is that gains on a deceased’s assets would be subject to capital gains tax at the time of death. For couples, this tax would not have to be paid until the surviving spouse dies.

Moreover, an individual could leave assets with up to $100,000 ($200,000 for couples) of gains to heirs free of any capital gains tax. On top of that, up to $250,000 in gains on an individual’s personal residence ($500,000 for couples) would not be subject to the tax. Clothing, small heirlooms, furniture and other such property would be tax exempt, too.

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It’s not spelled out whether the heir or the deceased’s estate would pay the tax. It’s likely the latter, says Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.

We’ll know more about the fate of these tax proposals when the president presents his budget in a couple of weeks.

AARP CEO Jo Ann Jenkins, who attended the State of the Union, says the president’s message comes during an important year for older Americans as Medicare turns 50 and Social Security celebrates its 80th birthday. She, too, is looking toward the budget and its impact on these programs.

“As we anticipate new budget proposals from the President and Congress, we urge our elected representatives to fight for responsible solutions to strengthen Medicare and Social Security,” Jenkins said in a statement. “If elected officials truly do want a strong middle class to have real possibilities in their lives, they must demonstrate as much with proposals that reflect the needs and views of the people they represent, instead of generating proposals that could cause irreparable harm.”

Photo: Bloomberg/Getty Images

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myexper 5pts

Republicans have already rejected the tax cut for struggling middle class families as it requires a tax increase on the nation's most wealthy in the 1%.

Republicans have a concern about taking away a tax loophole for the wealthy, even after several decades of tax reductions for the wealthy. But the same Republicans have absolutely no concern with taking away seniors' Social Security benefits and eliminating seniors' Medicare.

fd3214 5pts

Everything that jerk in the White House does affects me - Negatively!

2Papa 5pts

Just exactly what is the definition of "middle class"?

Rudyy1946 5pts

Lets get on the record that we need to have social secuity benefits removed from the federal income tax form.  Middle and lower middle class seniors are getting shafted on having to pay federal income tax on up to 85 % of our social security beneifits.  We pay not only on the cash we received, but also on the cost of our Medicare.  No one but Seniors in the United States pays income tax on their medical benefits.  

myexper 5pts


Instead of childish name calling with absolutely no facts, please be aware of the following:

- President Obama saved the entire country from financial collapse, right after he took office.

- President Obama brought us out of the massive Bush recession, the greatest recession since the great depression.

- Under President Obama, nearly all economic indicators show huge continuous improvement, WITH THE STOCK MARKET AT A  RECORD HIGH, instead of the near collapse under Bush.

- President Obama ended two unfunded wars, started under the previous Republican Bush administration .... costing thousands of America lives and trillions in debt.

- President Obama (and Democrats) stopped Republican attempts to kill your Medicare.

- President Obama (and Democrats) stopped the Ryan Republican Budget which would have taxed the middle class to death, killed traditional Medicare, removed safety nets for the poor and given the wealthy enormous tax cuts.

tg560 5pts


Stoshie 5pts

@2Papa Interesting question.   Here is what the Wall Street Journal has to say about that:

"In major campaign speeches and addresses–like the State of the Union address–politicians love to talk about the “middle class.”

Just who is in the middle class? The term has no formal economic definition, and that’s one reason politicians use it."

Stoshie 5pts

@Rudyy1946 I agree. I pay taxes on the money I take out of my IRAs, which I can understand.  But that causes taxes to also be taken from my SS, if I reach a certain income level. I don't think taxes on SS benefits is fair.

myexper 5pts


Your comment is not quite true. We did not pay any taxes on the Social Security match that our employers paid into the system. And not all seniors have to pay taxes on their Social Security. The Federal Tax on your Social Security benefits, if any at all, depends on your total income and what percentage your Social Security benefit  is relative to your total income.

But Social Security Tax is not your immediate problem. Now that Republicans control Congress, they will install their plans to cut Social Security benefits for all of us. And they have already started with a new rule the Republicans have approved in the House.