BO’S SOTU TAX PROPOSALS

BO has released some of the tax proposals he will be presenting in tomorrow night’s State of the Union Address.

Before I look at his specific proposals let me explain what, in my opinion, the idiots in Congress should, but I expect never will, do (although it has been suggested by several legitimate sources, other than me,  during the Dubya an BO presidencies).

Our current Tax Code should be totally shredded and we should start from scratch.  “Everything is taxable, except.”  And “nothing is deductible, except”.  Only those “excepts” that are appropriate and necessary should be added back.

All “industry-specific” individual and business “loopholes” should be permanently closed.

Government welfare and other benefit programs should no longer be distributed via the 1040, and there should most definitely be no “refundable” tax credits.  And, most definitely, there would be no dreaded Alternative Minimum Tax.

When looking at what “tax expenditures” are appropriate and necessary we should consider only those items that encourage saving, investment, and general economic growth.

That said, let me now take a look at BO’s proposals.  I have used the recent post of Kelly Phillips Erb, FORBES.COM’s TaxGirl, titled “President's New Tax Proposal Would Hit Wealthy, Benefit Middle Class”, and “Obama Proposes New Tax Hikes on Wealthy to Aid Middle Class” by Richard Rubin and Margaret Talev at BLOOMBRG.COM, among other recent blog posts and articles, as my sources.

* Establish a Tax Credit for Two-Income Families 

It’s deja vu all over again.  Or everything old is new again.  This is certainly not new – just a return of the “Schedule W” from the 1970s.  {Aside - as I recall (please correct me if I am wrong) the Schedule W was one of the rare tax benefits that was introduced after the beginning of the tax filing season and made retroactive to the prior year – so we actually had to prepare amended returns for some clients to claim this benefit}.

This is an admirable partial "fix” to the “marriage tax penalty” that currently exists in the Tax Code because of the way the tax tables are written.  As KPE explains, it provides –

“. . . a tax credit of up to $500 for families with two working spouses. The credit would be equal to 5% of the first $10,000 of earnings for the lower-earning spouse in a married couple, and the maximum credit would be available to families with incomes up to $120,000, with a partial credit available up to $210,000.”

My solution to the “marriage tax penalty” is to create one filing status and one tax table – but allowing married couples to file one tax return which separately reports and taxes the individual net taxable income of each spouse.

However anything that reduces the marriage tax penalty is good – and I would not oppose this new credit.  Thankfully it would not be “refundable”.

* Increase the Child Care Credit 

BO would increase the maximum Child and Dependent Care Credit to $3,000 (half of the first $6,000 of child care costs) per child for children under 5.  The maximum credit could be claimed by families making up to $120,000.  Again, also thankfully, the credit would not be “refundable”.

But he would repeal Flexible Spending Accounts for child care, which let people set aside up to $5,000 a year before taxes.

Again I do not necessarily oppose an increase in the Child and Dependent Care Credit – though I probably would not support doing away with Dependent Care FSAs.

However, if there must be an income limitation, and I do not think there should be one (I generally oppose AGI limitations on deductions and credits) I feel $120,000 is too low.  My clients for the most part live in New Jersey, with some in New York.  In the northeast $120,000 in income is not a lot.  While families in Kansas, or even in parts of my new home state of Pennsylvania, with income of $120,000 may be living large, those with similar incomes in NJ, NY and several other states are just getting by.

* Expand the Earned Income Tax Credit (EITC)

KPE tells us that, “despite heavy criticisms of the EITC (which has become a magnet for tax fraud)” -

“The President’s proposal would double the EITC for workers without qualifying children, increase the income level at which the credit phases out, and make the credit available to workers age 21 and older.”

The increased credit would, I expect, be refundable.

I am the biggest critic of the Earned Income Tax Credit.  The EITC is federal welfare and does not belong in the Tax Code!  Period!  Exclamation Point!

I oppose any expansion or enhancement of the Earned Income Tax Credit – or any “refundable” tax credit.

That is not to say that the government should not assist, encourage, or reward the “working poor”.  But it should be done through the current Aid to Families with Dependent Children program.

Revamp Education Benefits

According to KPE -

“The President’s plan would consolidate existing education tax benefits. . . The move would . . . allow more students up to $2,500 in tax breaks each year over five years.  Specifically, the Lifetime Learning Credit and the tuition and fees deduction would be eliminated and replaced by an expanded American Opportunity Credit (AOC).  The refundable piece of the AOC would also be increased.”

BO would also “eliminate tax on student loan debt forgiveness under Pay-As-You-Earn (PAYE) and other income-based repayment plans” and “repeal of the student loan interest deduction for new borrowers”.

If education benefits must remain in the Code (and I do not believe they should) then consolidating existing education benefits into one expanded AOC is a good idea.  But, obviously, none of the credit should be “refundable”. 

And I would allow the credit to be claimed over six (6) calendar tax years.  Education is measured on a “fiscal” year – a student incurs undergraduate degree costs during five (5) calendar years.

I would not oppose eliminating tax on forgiven student loan debt.  But, while I would certainly prefer direct subsidies for student loan interest, I do not think I would support eliminating the student loan deduction on only some payees.

BO is also proposing “America's College Promise”, which would provide “the first two years of community college free for everybody” who maintains a minimum 2.5 GPA.   

Now this is something I could really support.  However there are no details on how this would be administered, nor how it would be paid for, yet.

This is also nothing new.  Tuition-free community college was first proposed by Harry Truman in 1947.   

Boost, and Limit, IRA Options 

Once again from KPE -

“Every employer with more than 10 employees that does not currently offer a retirement plan would be required to automatically enroll their workers in an IRA – called an ‘auto-IRA’.”

Tax credits would be given to employers to help with the implementation and administration costs.

And

“The proposal would also demand that employers who offer retirement plans permit part-time employees who have worked at least 500 hours per year for 3 years or more to make voluntary contributions to the plan.”

And

“The President’s plan would also bar contributions to and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances have reached $3.4 million.”

I support anything that would encourage retirement savings.  As I said in a post this past December “Everybody Ought to Have an IRA”.  But I would need to know more of the mechanics of these required employer-sponsored IRAs. 

Would contributions come from the employer or the employee?  I doubt very much the government could, or should, require individuals, or employers, to make contributions to an IRA.  At most I think that employers would be required to offer employees the opportunity to make voluntary contributions to an IRA via payroll withholding.

And I would support allowing permanent part-time employees to make voluntary contributions to an employer-sponsored plan, without a required employer match.

But I definitely do not support limiting retirement savings, or any kind of savings, or the accrual of benefits within retirement plans.    

No real surprise from BO with any of his proposals - he does not want “tax reform” or “tax simplification”.  He wants to continue complicating the Tax Code further by expanding “tax expenditures” that do not belong Code in the first place. 

How will BO pay for this “middle class tax relief”?  I’ll tell you tomorrow (which means that the normal Tuesday BUZZ will be pushed to Wednesday).

TTFN