Senate Democrats

Democrats are Providing Urgently Needed Tax Relief for Middle-Class Families

President Obama and the Democratic Congress have inherited the worst economic crisis in generations and are confronting a Republican Deficit created by years of irresponsible spending and misplaced priorities. While the road to a full, sustainable recovery is long, President Obama and the Democratic Congress have taken the first steps toward making critical investments that strengthen the middle-class and get our economy working again.

The American Recovery and Reinvestment Act (P.L. 111-5) and Fiscal Year 2010 Budget Resolution (S.Con.Res.13) go a long way towards making life affordable again by providing tax cuts to hardworking middle-class families. These provisions are essential if we are to ensure that ALL Americans recover from this economic downturn.

Tax Relief in the Economic Recovery Package for the Middle-Class

In February, the Democratic-led Congress took the first step toward recovery by passing urgently-needed legislation requested by President Obama to help our nation recover from the current recession and make long-term investments to strengthen our economy. This bill, the American Recovery and Reinvestment Act (P.L. 111-5), featured $288 billion in tax cuts, including tax cut for 95 percent of all working households.

The American Recovery and Reinvestment Act will help alleviate the middle-class squeeze by providing tax relief to working Americans so that they can fully reap the benefits of their hard work and stabilize their families’ finances.

Money back in the pocket of workers

·         The Making Work Pay Credit: An individual tax credit of up to $400 for working individuals and $800 for working families in 2009 and 2010. This tax credit is calculated at a rate of 6.2 percent of earned income, and is phased out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples filing jointly). Taxpayers will receive this benefit through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns. According to the White House, eligible taxpayers will see that tax cut in their paycheck by April 1, 2009.

·         Economic Recovery Payment: A one-time payment of $250 to Recipients of Social Security, SSI, Railroad Retirement and Veterans Disability Compensation Benefits.

·         Refundable Credit for Certain Federal and State Pensioners: A one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits.

Increased relief for families

·         Increase in the Earned Income Tax Credit: An increased credit for working families with three or more children. The credit percentage is increased for these families to 45 percent of the first $12,570 of earned income (previously 40 percent). Also, to provide relief from the “marriage penalty,” the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) is increased by $1,880.

·         Increased eligibility for the Refundable Portion of Child Credit: An expansion in the eligibility for the refundable child tax credit in 2009 and 2010. For 2008, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $8,500. The American Recovery and Reinvestment Act reduces this floor for 2009 and 2010 to $3,000.

Help for students

·         “American Opportunity” Education Tax Credit: A new tax credit of up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this new program, taxpayers will receive a tax credit based on 100 percent of the first $2,000 and 25 percent of the next $2000 of tuition and related expenses (including books) paid during the taxable year. Forty percent of the credit is refundable. This tax credit is phased out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).

·         Allowing computers to qualify as qualified education expenses in 529 Education Plans: The list of qualified education expenses eligible to be funded from “529” tax-advantaged savings plans is expanded to include computers and computer technology.

Relief for the Unemployed

·         Temporary suspension of taxation of unemployment benefits. A temporary suspension of the federal income tax on the first $2,400 of unemployment benefits per recipient in taxable year 2009. Any unemployment benefits over $2,400 will be subject to federal income tax. Under current law, all federal unemployment benefits are subject to taxation. The average unemployment benefit is approximately $300 per month.

Incentives for First-Time Home Buyers

·         Refundable Home Buyer Credit: Modification of a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. The provision, originally enacted last year, applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to re-pay any amount received under this provision to the government over 15years in equal installments, or, if earlier, when the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The American Recovery and Reinvestment Act eliminates the re-payment obligation for taxpayers that purchase homes after January 1, 2009, increases the maximum value of the credit to $8,000, removes the prohibition on financing by mortgage revenue bonds, and extends the availability of the credit to homes purchased before December 1, 2009. The provision retains the credit recapture if the house is sold within three years of purchase.

Protection from the AMT

·         Extension of AMT relief for 2009: An extension ofAlternative Minimum Tax (AMT) relief for nonrefundable personal credits and increasing the AMT exemption amount to $70,950 for joint filers and $46,700 for individuals. This will provide more than 26 million families with tax relief in 2009.

Tax Relief in the Budget for the Middle-Class

The middle-class experienced few of the benefits of economic growth in recent years. Indeed, the median income of working households fell in adjusted terms by nearly $2,000 between 2000 and 2007. And that situation, of course, has further worsened during the current recession.

The Fiscal Year 2010Budget Resolution (S.Con.Res.13), which is beingdebatedon the Senate Floor this week, cuts taxes for working families and ends the irresponsible Bush tax giveaways to multimillionaires. The Budget Resolution also makes it easier for families to send their children to college and save for retirement. And, for those families whose ingenuity and entrepreneurship fuel our economy, our budget would eliminate capital gains for investments in small businesses. The Budget Resolution accommodates substantial tax relief for the middle-class through:

Extension of the middle-class tax cuts that expire in 2010

The Budget Resolution makes permanent the 2001 and 2003 tax cuts for middle-income taxpayers, including:

·         Marriage penalty relief;

·         The 10-percent income tax bracket;

·         The $1,000 child tax credit; and

·         Other 2001 and 2003 tax changes for couples with incomes under $250,000 and singles with incomes under $200,000, including the 25 percent and 28 percent income tax brackets and the preferential rates for capital gains and dividend income.

Assistance for those who need it most

·         The Budget Resolutionwould make permanent the expansions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), enacted as part of the American Recovery and Reinvestment Act.

The EITC expansion increases the credit for families with three or more children and provides additional relief for low-income married couples, while the CTC expansion lowered the income threshold for eligibility for a refundable credit to $3,000.

Help for families to send their children to college

·         The Budget Resolution proposes to make permanent the American Opportunity Tax Credit, which was enacted as part of the American Recovery and Reinvestment Act. This tax credit expands the Hope Credit, increasing the credit amount to $2,500 and making it available for four years; in addition, a portion of the benefit is available to those with no income tax liability.

Savings incentives

·         The Budget Resolution provides for automatic enrollment in IRAs and 401(k) programs, requiring employers that do not offer 401(k)s to offer automatic enrollment in IRAs, allowing employees to contribute through payroll tax deductions.

·         The Budget Resolution expands tax credits that reward saving for retirement, including making the “saver’s credit” fully refundable.

Protection from the AMT

·         The Budget Resolution protects millions of middle-class families from being hit by the alternative minimum tax for the next three years, a tax originally intended to apply only to the very wealthy.

Supports small businesses

Thefinancial crisis is threatening the viability of America’s small businesses. Even if they have healthy balance sheets and operations, family-run companies and other small firms are faced with restricted access to credit and skyrocketing health care costs.

·         The Budget Resolution provides an incentive for investment in small businesses to help create jobs and turn our economy around by providing for the elimination of all capital gains taxes on investments made in small and start-up businesses.

·         The Budget Resolution also calls for making permanent the current expensing rules for small businesses.