Don't Mess With Taxes

There were no big surprises, tax or otherwise, in President Obama's State of the Union circa 2014.

That's understandable. He's -- sorry Obama fans, I have to say it -- a lame duck whose party is trying to hang onto the Senate in the coming midterm elections. So the president's big political assignment last night was to offer some relatively noncontroversial talking points that Democrats could take to voters this fall.

Cursory tax reform talk: OK, I know the State of the Union address can't be a total tax talk <sigh>. But I had hoped for a little more.

Oh sure, Obama mentioned tax reform, but who doesn't nowadays. It's always fun to talk about, but it's very hard to accomplish. The last big tax overhaul was back in 1986.

True, many existing Bush-era tax laws were made permanent in the fiscal cliff bill, officially known as the American Taxpayer Relief Act (ATRA) of 2012. And higher tax rates for wealthy folks were part of the final deal.

But that took more than two years of temporary extensions, expirations and Congressional fighting before ATRA was finally enacted Jan. 2, 2013.

And now that it's an election year, expect more talk than action. It's always easier to campaign on all sorts of possible tax changes than to defend any actual tax law restructuring.

So that's why, aside from a cursory mention of general corporate tax reform, the prez didn't get into too much tax talk last night.

Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Let's flip that equation. Let's work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.
                         -- President Barack Obama, State of the Union, Jan. 28, 2014

He did, however, propose two individual tax code tweaks that tied into the general theme of helping the middle class move up the economic ladder.

Expanded EITC: The Earned Income Tax Credit (EITC) is a long-standing piece of tax legislation used to implement economic policy to help lower-income workers. It was created in 1975 to offset the Social Security taxes that take a relatively big bite out of low-wage paychecks.

The key here is earned income, such as a salary, wages and/or tips. You have to make money to qualify for the EITC, but you can't make too much money.

For 2013 taxes, EITC claimant earnings must be less than:

• $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children,
• $43,038 ($48,378 for married filing jointly) if you have two qualifying children,
• $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or
• $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child.

Because it's a tax credit, it offsets a taxpayer's Internal Revenue Service bill dollar for dollar. And because it's a refundable credit, you could get a check back from the Treasury if you have some EITC left over after you've zeroed out your tax bill.

The EITC provides the most benefit to families with children. On 2013 tax returns, that could be as much as $6,044. But a lot of working poor are single folks without kids. The most they can get on their returns filed this year is $487.

So Obama followed up on already suggested changes to the EITC.

There are other steps we can take to help families make ends meet, and few are more effective at reducing inequality and helping families pull themselves up through hard work than the Earned Income Tax Credit.  Right now, it helps about half of all parents at some point. But I agree with Republicans like Senator Rubio that it doesn't do enough for single workers who don't have kids. So let's work together to strengthen the credit, reward work, and help more Americans get ahead.
                         -- President Barack Obama, State of the Union, Jan. 28, 2014

Since Sen. Marco Rubio, one of the Republican party's poster boys, is a supporter of this change, it might actually happen this year.

Another retirement option: Savings is also an area of extreme financial inequality. Most lower-income folks are more concerned about making their money work in the here and now for rent and groceries. They don't put much, if any, aside for future retirement.

Obama is proposing yet another tax-favored retirement vehicle, My Retirement Account or MyRA for short, for these individuals.

Let's do more to help Americans save for retirement. Today, most workers don't have a pension. A Social Security check often isn't enough on its own. And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401k(s). That's why, tomorrow [Jan. 29], I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It's a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. ... Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber [Congress] can.
                                                      -- President Barack Obama, State of the Union, Jan. 28, 2014

Details are still emerging, but basically under the MyRA plan, workers could have a portion of their pay deducted and put into an account invested in U.S. government bonds. For tax purposes, the MyRA would be treated as an individual retirement account. Once the MyRA reached a certain balance, the money would be rolled over into an IRA.

The president plans to bypass Congress and put MyRA into place via executive order.

And the president's mention of automatic enrollment is a feature that is already in place at some companies. At those workplaces, employees are automatically enrolled in company 401(k) plans unless they opt out.

Housing, too, in passing: Obama also touched on housing, although not in any great detail and without any mention of specific tax breaks, such as the mortgage interest tax deduction.

Rather, the president wants the House and Senate to "send me legislation that protects taxpayers from footing the bill for a housing crisis ever again, and keeps the dream of homeownership alive for future generations of Americans."

How much of the president's ideas will actually make it into law? Probably not many. The State of the Union is essentially every president's annual wish list.

And the four -- yes four -- Republican responses to the president's speech basically shot down everything he suggested.

But the annual look at what's legislatively possible still can be a good starting point for some action on Capitol Hill.

You also might find these items of interest:

• Mortgage tax break contributes to income inequality
• Tax code's EITC contribution to the safety net for the poor
• Tax breaks for minimum wage workers