Content starts here

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.

President Barack Obama at 2015 SOTU
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.

>> Get discounts on financial services with your AARP Member Advantages.

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.

Share Your New Year’s Resolution for a Chance to Win $100. Enter Now! See Official Rules

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

Also of Interest

See the  AARP home page for deals, savings tips, trivia and more.

Search AARP Blogs