Expanding the Earned Income Tax Credit in 2016

** See this article for the latest Earned Income Tax Credit adjustments released by the IRS


[Updated following SOTU speech] Following President Obama’s state of the union speech and in addition to the items below, he had some good news on expanding the Earned Income Tax Credit (EITC)  for 2016, which actually partisan support. The EITC supplements the wages of low income workers, and especially working mothers, lifting more children out of poverty than any other single federal program.  Because it is a tax credit it is money straight in the pockets (refund) of recipients or reduces the amount of tax they owe. Over 7 million families are eligible for the EITC last year, though only about 70% actually claim it. The EITC and $500 second earner credit would benefit working families. Here are the President’s official remarks on these items from the speech:

Expanding the EITC for Workers without Children and Noncustodial Parents

The President’s plan to help working families get ahead incorporates his proposed childless worker EITC expansion, reducing poverty and hardship for 13.2 million low-income workers struggling to make ends meet while promoting employment. 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 it available to workers age 21 and older. Ways and Means Committee Chairman Ryan has endorsed the President’s proposed expansion, while other members of Congress have put forward similar proposals.

The President also continues to propose making permanent improvements to the EITC and CTC that augment wages for 16 million families with 29 million children each year. These improvements provide additional benefits to low-income working parents, families with three or more children, and married families, but are currently scheduled to expire at the end of 2017. Allowing these benefits to expire would result in a roughly $1,700 tax increase for a full-time minimum wage worker with two children. Research has consistently shown that the helping low-wage working families through the EITC and CTC not only boosts parents’ employment rates and reduces poverty, but has positive longer-term effects on children, including improved health and educational outcomes.

Capital Gains Death Tax, $500 Second Earner Credit and Tripled Child Care Credit in Obama’s Middle Class Tax Breaks

The battle for the middle class vote has heated up with President Obama set to unveil, at his upcoming state of the union speech, a whole host of tax breaks for the middle class at the expense of the richest Americans. This follows on from the democratic plan for a $2000 middle class pay check credit bonus  recently released by Democratic House Rep. Chris Van Hollen. The Obama administration middle class tax reform plan includes the following proposals:

  • Raise the top tax rate on capital gains and dividends to 28 percent from 23.8 percent. This would be a nearly 90% increase from the capital gains rate (15 percent) during the Bush era.
  • Impose a capital-gains death tax to address a loophole on asset transfers at death. Under current law, assets held until death are exempt from capital gains with heirs only having to pay capital-gains taxes when they sell and only on the value above what the assets were worth at death. According to Bloomberg and White house press releases’ Obama’s capital gains death tax proposal would exempt the first $200,000 in capital gains per couple plus $500,000 for a home, along with all personal property except for valuable art and collectibles. The rest would be treated for income-tax purposes as if it had been sold. 99 percent of the tax burden from the capital-gains proposals would be paid by the top 1 percent.
  • The proposal also includes a $500 second-earner working tax credit for married couples when both work. This addresses the higher marginal tax married couples face relative to singles with similar incomes. Middle class couples, to whom the full credit would be available, are defined as those couples with incomes up to $120,000 (the credit would phase out at the $210,000 income threshold).
  • Triple the maximum child care tax credit to up to $3,000 for children under five. meaning that the government would effectively pay half of the first $6,000 of child care per child for some families.

The above tax breaks and reforms are in line with Obama’s plans and ideology which looks to increase taxes on the wealthy to fund/redistribute tax cuts for middle-class income families. However with a Republican controlled Congress it is unlikely the Presidents proposal will pass in its current form.

Though some credits like the second-earner and child care ones do have bi-partisan support, and if the President makes compromises on other Republican agenda items (like Keystone XL and corporate tax reform) there is a good chance these credits could pass Congress this year.

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4 thoughts on “Expanding the Earned Income Tax Credit in 2016”

  1. This is what Norquist from the Americans Tax Reform institute had to say about Obama’s plan”


    Under current law, when you inherit an asset, your basis in the asset is the higher of the fair market value at the time of death or the descendant’s original basis. Almost always, the fair market value is higher.

    Under the Obama proposal, when you inherit an asset, your basis will simply be the descendant’s original basis.

    Example: Dad buys a house for $10,000. He dies and leaves it to you. The fair market value on the date of death is $100,000. You sell it for $120,000. Under current law, you have a capital gain of $20,000 (sales price of $120,000, less step up in basis of $100,000). Under the Obama plan, you have a capital gain of $110,000 (sales price of $120,000, less original basis of $10,000).

    There are exemptions for most households, but this misses the larger point: The whole reason we have a step up in basis is because we have a death tax. If you are going to hold an estate liable for tax, you can’t then hold the estate liable for tax again when the inheritor sells it. This adds yet another redundant layer of tax on savings and investment. It’s a huge tax hike on family farms and small businesses.

    It’s like a second death tax (the first one has a top tax rate of 40% and a standard deduction of $5.3 million/$10.6 million for surviving spouses). Conceivably, an accumulated capital gain could face a 40% death tax levy and then a 28% capital gains tax on what is left. Do the math, and that’s an integrated federal tax of just under 60% on inherited capital gains.

  2. I have been noticing for a long time that the difference between the tax rate on capital, and the tax rate on labor, is quite high. However, I’m always concerned about sudden jumps (or falls) in the tax rates. A more gradual adjustment would probably be conducive to economic stability. Say, bump the marginal overall tax rates down by 2% per year, and the marginal cap gains rates up by 2% a year, for 3 years. Any time somebody wants to double a marginal rate (14% to 28%) overnight, sounds like a nasty jolt.

  3. Clearly Obama is going to sell the above in the State of the union speech against the back drop of the improving economy. But its all just politics as none of it is going to get passed by the Republican congress whose main goal is oppose Obama. Gridlock and politics, that’s all Washington Is!

    Don’t believe me, see this summary from the times – “Congressional Republicans say Mr. Obama’s tax-hike plan is dead on arrival, a development that will come as no surprise to the president and his advisers, who’ve been watching the GOP reject tax increases for years. But analysts say Mr. Obama is setting the stage to issue more executive actions over the next two years in areas where Congress won’t act, and also pounding on themes that he hopes will put the GOP on the defensive heading into the 2016 presidential election.”

    • It is nothing new for a president, or better still a politician to take credit for a success that they had absolutely nothing to do with. However, Obama is different. He did everything to prevent a normal recovery and now he will hypocritically take credit and bask in the applause from the phony Democrats rising to their feet like pop up toys.


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