Obama's Middle Class Tax Credits: What Do They Mean for You?

Jan. 26, 2010 — -- The Obama administration's new middle class initiatives will put more money into the pockets of many Americans, but will it bolster the flagging economy? Reactions to the plan, unveiled Monday as part of a forthcoming report by the administration's Task Force on the Middle Class, have largely split among ideological lines.

Here's a look at some of the administration's proposals, what analysts are saying about them and what they mean for you:

For Working Parents: Expanding Child and Dependent Care Tax Credit for Middle Class Families

Right now, parents earning above $43,000 a year can receive credit for 20 percent of their child care expenses and may claim expenses of up to $6,000 for two or more children, resulting in a maximum total tax credit of $1,200, according to 2009 tax return guidelines from the IRS. (Those earning below $43,000 are eligible to receive a credit for a higher percentage of their expenses.)

Under the administration's proposal, parents earning up to $85,000 a year would receive credit for 35 percent of their child care expenses -- a credit level that, currently, is only available to parents earning less than $15,000 per year -- bumping up their maximum total tax credit to $2,100.

A fact sheet released by the White House said that eligible families making up to $115,000 per year would also see an increased credit.

John Irons, research and policy director of the left-leaning Economic Policy Institute, argues that expanding the credit would benefit both individual families and the economy as a whole.

"A lot of people struggling to pay their child care expenses -- this would be a nice boost for them," Irons said. "For the economy, it obviously puts more money into the economy -- it gives families more disposable income which they can roll back into the economy."

But will the extra amount that working parents might spend really make a difference?

Curtis Dubay, of the conservative Heritage Foundation, argues no.

"This is not a pro-growth tax cut," said Dubay, the senior tax policy analyst at Heritage. He and others, including libertarians, argue that only broader cuts to marginal tax rates -- rather than targeted tax credits -- will encourage more Americans to work, earn and ultimately spend more.

"The instinct to cut taxes is right but doing it through expanding the child tax credit is the wrong way to go about that," he said.

Obama Unveils Proposals to Help Middle Class Taxpayers

As with the Obama administration's expanded child care tax credit, changes proposed to the saver's tax credit would extend more benefits to higher-income groups than in the past.

The saver's tax credit helps Americans save for retirement by providing a tax credit to match their own retirement savings up to a certain amount. Under current IRS regulations, married couples filing jointly are only eligible for the full saver's credit if their adjusted gross income (AGI) is no more than $55,000. The new proposal increases this income maximum to $65,000 and also offers partial credits to families earning up to $85,000.

"Extending the AGI cutoff level from the current $55,500 to $85,000 would be particularly significant because couples with higher incomes are more likely to have the capability to make contributions to their retirement plans," Tom Ochsenschlager, the vice president of taxation for the American Institute of Certified Public Accountants, wrote in an e-mail.

The new plan changes the existing formula for determining saver's credits to 50 percent of the first $1,000 contributed, meaning that families earning up to $65,000 would see a $500 credit if they contributed at least $1,000 to their retirement savings.

The credit would be refundable: Americans who don't earn enough to pay income taxes would still have their retirement savings matched by the government.

Not all middle-class Americans, however, would see their retirement savings bolstered by the proposal. That's because current rules take the first $2,000 of individual retirement contributions -- not $1,000 per family -- into account when determining the size of a tax credit. Depending on their income, Americans can see between 10 and 50 percent of their contributions reimbursed.

So who could be hurt by the change? Take, for instance, a married couple earning total income between $33,000 and $36,000 who file a joint tax return. Under current tax rules, if each spouse contributes $2,000 to a qualifying retirement plan -- $4,000 total -- they would be eligible for a credit equal to 20 percent of their contributions, or $800. That's $300 more than the couple would receive under the administration's proposal.

If the proposal's $1,000 threshold really applies to families and not individuals, "then it's not an advantage for people at that lower level," Ochsenschlager said.

Overall, some say the credit likely won't provide an immediate boost to the economy because it would encourage saving as opposed to stimulating spending. And critics grouse that expanding the credit would result in yet another cost that the government would add to an already-ballooning deficit.

But a major benefit of the credit, said Heritage Foundation senior research fellow David John, is that it may result in a cost savings for the government in the long run: workers benefiting from the credit now may rely less on government aid once they reach retirement age.

"The question they're going to have to ask and that Congress is going to have to answer is whether or not the potential value of a saver's credit in the long run, " John said, "is worth the cost of establishing the saver's credit."

For Student Loan Borrowers: Limiting Loan Payments to 10 Percent of Income

Under another of the White House proposals, the payments for a borrower of a federal student loan would be limited to 10 percent of their income above what the administration called "a basic living allowance." For a single person with a $30,000 income and a $20,000 student loan, monthly payments would drop from $228 a month to $115 a month on a ten-year repayment plan, according to the administration's fact sheet.

Irons of the Economic Policy Institute says the cap could inject at least some more money into the economy.

For recent graduates struggling to find well-paying jobs in a tough economy, it can "help them get by for a few years until the economy improves again," he said. In the meantime, he added, graduates who find themselves with a little extra cash thanks to the cap are the "people most likely to spend that extra money."

But Heritage's J.D. Foster, a senior fellow at the the foundation, argues that "bailing out" recent college grads isn't the best way to spend government funds.

The president is "just picking out one particular group and saying, 'We're going to bestow on you a special benefit' " he said. "The rest of the country might like that particular benefit in the form of tax relief."

More Proposed Initiatives

Other proposals by the Task Force on the Middle Class include:

Automatic IRAs: Employers who do not offer retirement plans to their workers would be required to set up individual retirement accounts that would automatically devote a certain percentage of a worker's salary to a retirement plan. Workers could opt out of the plan. Very small companies would be exempt from the requirement. A tax credit would help defray the administrative costs of the IRAs, according to the administration's proposal.

More Transparent 401(k) Plans: The administration says this proposal would improve transparency related to 401(k) retirement plan fees, encourage plan sponsors to provide workers with investment advice, promote annuities and other guaranteed lifetime income options and require clear disclosures related to target-date funds, which adjust workers' investments as they near retirement age.

More Funding for Programs to Care for the Elderly: The administration's Caregiver Initiative would provide $52.5 million to the Department of Health and Human Services for caregiver support programs -- including counseling and training -- as well as $50 million for programs that provide transportation, adult day-care and in-home services related to the elderly.

Some say they're not terribly impressed by any of the proposals thus far -- what they'd really like to find out, they say, is whether Obama will extend tax cuts passed during the Bush era or whether the president will allow them to expire. Under Bush's tax cuts, the highest marginal tax rate dropped from 39.6 percent to 35 percent, while the fourth-highest tax rate, 28 percent, dropped to 25 percent.

"What we're most interested in hearing, we haven't heard -- is it true the rumor that the Bush tax cuts might be extended an extra year?" said Bill Ahern, a spokesman for the conservative Tax Foundation. "There's been no hint on that and since many of the Bush tax cuts are middle-class tax cuts, that's the thing that we're looking to finding out."

The president did offer at least one clue about his tax plans in an exclusive interview Monday with ABC's "World News."

Asked if he could guarantee that there would not be a tax increase for anyone making less than $250,000, Obama said, "I can guarantee that the worst thing we could do would be to raise taxes when the economy is still this weak."

The New Middle Class?

The proposals from the administration and the Task Force on the Middle Class -- led by vice president Joe Biden -- come as the definition of middle class seems to be evolving.

A new report from the U.S. Commerce Department's Economics and Statistics Administration argues that being a middle class family has more to do with a family's goals than its income. Those goals, according to the report, include home ownership, a car, college education for their children, health and retirement security and occasional family vacations.

Lower-income families, the report said, can meet these goals through planning and saving but certain obstacles can set them back: if, for instance, they live in area with high housing costs (something that can hurt even higher-income families), lack employer-provided health insurance or have to spend significant amounts on child care or elder care.

It's harder than ever for a family to achieve middle-class status, the report said, because prices for health care, college and housing have risen faster than incomes. Since 1990, health insurance premiums and out-of-pocket expenses have jumped 155 percent, college tuition for public, four-year colleges has risen 60 percent and housing prices are up 56 percent.

Meanwhile, familiy incomes, after rising in the 1990s, were stagnant after 2000, according to the report.

"The American dream is attainable, but if we don't attack the big problems today, whether it's health insurance, education, childcare or housing, it will be harder for more and more American families to reach the middle class," Commerce Secretary Gary Locke said in a statement issued Monday.