President Obama sent his nearly $4 trillion budget proposal for 2015 to Congress on Tuesday, a blueprint that he says will expand “opportunity for Americans,” and it will most certainly impact their budget.
Much of what will impact taxpayers in the budget was outlined by the president in his State of the Union Address in January, including the myRA retirement savings plan and expanding the Earned Income Tax Credit (EITC) for workers without children. The White House says expanding eligibility for the credit will cut taxes for 13.5 million working Americans.
While many of the president’s proposals could impact consumers’ bottom lines, David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, points out that Congress hasn’t passed a real budget since 2009 for fiscal year 2010, and the White House and Congress did agree to a two-year budget pact just three months ago.
“I would wait to make any personal finance decisions. The first thing to remember is that this is just a proposal by the president, who will have trouble getting it through Congress,” Wessel says.
While it remains to be see just how much of Obama’s budget will become reality, here’s how some of the items could impact your personal finances if passed by Congress:
Earned Income Tax Credit Expansion
The president’s budget expands the eligibility of who can claim the EITC to younger workers ages 21 to24 and those ages 65 and 66. The EITC is a federal tax credit for low- and moderate-income working people to help offset federal payroll and income taxes.
The White House says the expansion will bring 500,000 people above the poverty line and will be paid for by closing tax loopholes that let high-income professionals avoid income and payroll taxes.
Pam Villarreal, labor expert at the National Center for Policy Analysis, says the move is an “expanded subsidy,” but may be a better solution than an across-the-board hike in the federal minimum wage. President Obama used executive order earlier this month to hike the federal minimum wage to $10.10 an hour for new federal contractors.
“It’s a better solution to getting people out of poverty than a push to increase the minimum wage,” she says. “If you really want to help people, it does a better job of targeting the working poor than to distort the labor market by enforcing a hike in the minimum wage.”
Wessel also supports the move. “People with low-wage jobs typically don’t have kids, so there is something of substance here. We should not require them to have kids in order to get this helping hand.”
The budget calls for automatic IRAs to expand access for workers to save for retirement. Obama first mentioned the myRA proposal in his State of the Union Address, touting it as a “starter retirement account” for those who do not have a 401(k) plan offered through work.
The accounts would be backed by the government, and once the saver hits $15,000, it is rolled over into a traditional IRA account. The White House says this will help 13 million workers start saving for retirement.
Villarreal says she was surprised to see this in the proposal, as the president said in his State of the Union Address that he would use an executive order to direct the Treasury to create this program.
“I don’t think it will help people save—we already have programs in place where people can save automatically even if they don’t work for a company that provides an auto-enrollment IRA,” she says.
But Wessel says the program would be a significant first step to help working Americans prep for retirement.
“Using the insights of behavioral economics, and what makes people save more is saving in the first place,” he says. “It’s pretty safe if you are putting payroll deductions into U.S. savings bonds. Banks aren’t typically interested in people who don’t have much money.”
Child Care and College Tax Breaks
The president’s budget would expand the Child and Dependent Care Tax Credit, which targets families with children younger than 5. This would give 1.7 million families an average tax cut of $600, the White House says.
The budget also calls for a permanent extension of the American Opportunity Tax Credit (AOTC), benefitting 11.5 million families and students by about $1,100 each. It also simplifies taxes for Pell Grant recipients by providing some with a reduction in taxes or boost to the AOTC.
The president also wants to exclude student loan forgiveness from being taxed for those who have made payments for an unspecified amount of years under an income-related payment plan. Wessel says he would be surprised if this move doesn’t gain traction as student debt surpassed $1 trillion for the first time last year.
“It’s the same problem we had with people who had mortgages underwater to work out a deal for the bank,” he says. “It just makes sense—you want to encourage people who can’t pay their loans to make payments on some of them.”