Obama wants better tax deal for working families

March 4, 2014: 3:06 PM ET
obama budget 1
President Obama's 2015 budget will tweak some old proposals designed to make life easier for the working poor, to make college and child care more affordable and to make saving for retirement easier.
NEW YORK (CNNMoney)

President Obama included several tax proposals to help low- and middle-income families in his 2015 budget proposal on Tuesday.

They're designed to help the working poor, to make child care and college more affordable, and to make it easier to save for retirement.

The cost of the proposals would be paid for by closing what the White House calls tax loopholes that affect the richest among us.

Among those provisions is the preferential tax treatment for carried interest paid to managers of private equity funds, including venture capital. Carried interest represents a share of profits from the fund and is taxed at the capital gains rate of 20%. Obama proposes, as he has many times before, taxing it as ordinary income.

Now, for a dose of budget reality: In most years, the House and Senate don't adopt much, if anything, from presidential budget proposals. And this time could be even worse in that regard since, among other things, it's a mid-term election year and no one expects much to happen legislatively, least of all tax reform.

Nevertheless, Obama's proposed changes do offer a window into the president's thinking should lawmakers choose to make any tax changes.

Expand tax credit for the childless working poor: Obama proposed to double the Earned Income Tax Credit for childless workers.

The EITC is an antipoverty program designed to encourage and reward work. But the credit primarily benefits workers who have children and does little to help very low-income childless workers or noncustodial parents. Their maximum credit is worth less than a tenth of what they could get if they had two or three children.

In fact, a childless person making the minimum wage and working full time would earn too much to qualify for the EITC, according to the Center on Budget and Policy Priorities, a left-leaning think tank.

Today, the maximum credit a childless worker can receive is $496. But once their income tops $8,110 the credit would get progressively smaller and would be phased out entirely once they made $14,590.

Obama would double the maximum credit to close to $1,000. He would also raise the top of the income threshold for eligibility from just under $15,000 today to about $18,000 next year.

The credit would also be made available to workers between the ages of 21 and 24. Today, childless workers under 25 are not allowed to claim it.

State of the Union in 90 seconds

The change would help an estimated 13.5 million workers and lift about half a million of them above the poverty line, the administration said. That's on top of the roughly 6.5 million people lifted out of poverty in 2011.

Obama's budget also calls for recent expansions of the EITC for workers with children to be made permanent.

While there's not much that Obama and Republicans agree on publicly when it comes to the safety net, the EITC has gotten relatively high marks from both parties as a poverty-fighting measure.

Related: Obama drops controversial Social Security proposal

Create Auto IRAs: Not for the first time, Obama called on Congress to authorize automatic IRAs to make saving for retirement easier for workers who don't have access to a 401(k) or other qualified retirement plan at their job.

Obama's proposal would require that companies that have been in business at least 2 years and have at least 10 employees set up auto IRA accounts for their workers if the company doesn't otherwise sponsor a retirement plan.

Employers would not be obligated to make matching contributions, but they would have to automatically deposit a portion of workers' paychecks into auto IRAs.

Employees would be given a choice of how much to deduct from their paychecks and would be able to opt out of the program.

Expand the Child and Dependent Care Tax Credit: The president's budget would make it less expensive for parents of very young children to hold a job or go back to school.

Currently the child and dependent care tax credit is worth 35% of child care expenses up to $3,000 per child, for a maximum of $6,000 per family. The credit applies to any child under the age of 13 and to disabled dependents of any age.

Under Obama's plan, parents of very young kids would get an even bigger credit. It would be worth up to 65% of the first $3,000 in child care expenses for one child under 5, and up to 65% of the first $6,000 for two children under 5. In addition, they could claim a credit of up to 30% on the next $1,000 per very young child, up to two kids.

The White House estimated the expansion would result in an average tax cut of more than $600 for 1.7 million families in 2015.

Make the American Opportunity Tax Credit permanent: A college tuition tax credit worth up to $2,500 a year is set to shrink in a few years unless Congress chooses to extend it.

Obama wants to make the American Opportunity Tax Credit permanent.

Such a move would benefit 11.5 million families and students, the White House estimates.

Join the Conversation
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.29%4.32%
15 yr fixed3.26%3.29%
5/1 ARM3.37%3.34%
30 yr refi4.26%4.29%
15 yr refi3.24%3.26%
View rates in your area
 
Find personalized rates:
Rate data provided
by Bankrate.com