Current Credit: Under current law, families with an AGI of $43,000 or more are limited to a child care credit equal to 20% of qualifying child care expenses (up to a maximum of $3,000 in qualifying expenses for one child or $6,000 for 2 children). Only families with an AGI lower than $15,000 are eligible for the 35% credit. Additionally, since the current credit is nonrefundable, families qualifying for the highest credit percentage rarely receive a tax benefit from the credit. Unlike most other credits, the child care credit does not completely phase out. The credit percentage merely phases down from 35% to 20%.

Proposed Credit: Increase the child care credit percentage from 20% to 35% of qualifying expenses for families with an AGI below $85,000. Families with an AGI of $113,000 or more may claim a 20% credit. For families with an AGI between those amounts, the credit percentage would be between 20% and 35% (the credit percentage would decrease 1%, but not below 20%, for every $2,000 increase in AGI over $85,000).

Benefits under the proposal

• The maximum credit for a family with two children with an AGI of $80,000 a year would increase from $1,200 to $2,100.

Limitations under the proposal

• The credit remains nonrefundable, therefore the lowest-income families will not benefit.
• Some taxpayers who are eligible to participate in a dependent care flexible spending account through their employer may find that paying for child care costs through this type of account provides a better tax benefit than claiming the credit.

Comparison Chart: The chart below shows how the child care credit percentages differ between the current credit and the proposed credit.

Current Credit: Under current law, the Saver's Credit is a nonrefundable credit of 50%, 20%, or 10% of the first $2,000 of qualifying retirement contributions. The credit percentage depends on filing status and modified adjusted gross income (MAGI). The maximum credit is $1,000 per individual taxpayer (on a joint return, each spouse may claim a maximum credit of up to $1,000 for a total credit of up to $2,000). Currently, for 2010, the credit is fully phased out at MAGI over $55,500 on a joint (MFJ) return, $41,625 on a head of household (HH) return, and $27,750 for single, married filing separately (MFS), or qualifying widower (QW) returns.

Proposed Credit: Under the proposal, the 50%, 20% and 10% credit structure would be replaced by a 50% match for the first $500 of qualifying retirement contributions. The maximum credit would be $250 for an individual taxpayer and $500 for a married couple filing a joint return. The MAGI limits for the maximum credit would be increased to $65,000 (MFJ), $48,750 (HH), and $32,500 (single, MFS and QW). The match would decrease at a 5% rate for MAGI exceeding those levels, and would completely phase out at MAGI of $85,000 (MFJ). Although not expressly stated, it is believed that the credit would completely phase out at MAGI of $63,750 (HH) and $42,500 (single, MFS, and QW).

The proposed refundable Saver's Credit would be deposited into the taxpayer's retirement account. For example, if a taxpayer contributed to a 401(k), the Saver's Credit match would be automatically deposited into the taxpayer's 401(k).

Under the proposal, some taxpayers will receive a higher overall benefit, because the lowest income taxpayers currently eligible for the credit receive no benefit from the nonrefundable credit. However, other taxpayers currently eligible for the credit will receive a lower overall benefit, because the maximum credit amount was lowered to $250 for individual taxpayers and $500 for married couples filing a joint return.

Benefits of the proposal

• The credit will be valuable to many lower-income taxpayers since it is refundable.
• Increased MAGI limits allow more taxpayers to qualify for the credit.
• Direct depositing the refundable credit into a retirement fund may ensure the funds will be reserved for retirement.

Limitations of the proposal

• The maximum credit is reduced from $1000 to $250 for individual taxpayers and from $2,000 to $500 for married couples filing a joint return.

Unknown information of the proposal

• It is unsure exactly what the MAGI cutoff is for filing statuses other than MFJ.

Comparison Chart: The chart below shows how the proposal would affect the 2010 calculation of the Saver's Credit on a joint return with one qualifying spouse.

Current Credit: The American Opportunity Credit (AOC) is currently in place only for the 2009 and 2010 tax years. As an expansion of the Hope Credit, the AOC increases the maximum credit from $1,800 to $2,500 and allows the credit for the third and fourth years of college in addition to the first two years. The credit is 40% refundable, which means that many lower-income individuals will benefit from an education credit for the first time. The AOC also has higher phaseout limits than the Hope and Lifetime Learning Credits, so many higher-income taxpayers are benefiting from an education credit for the first time. Most taxpayers receive a greater benefit from the AOC than they would from a Hope or Lifetime Learning Credit, and the proposal to make the AOC permanent would continue to benefit those taxpayers.

Proposed Credit: Make the American Opportunity Credit (AOC) permanent. The maximum amount of the AOC is $2,500 per student for each of the first four years of college. It is generally 40% refundable, which means qualifying taxpayers can receive a refund of up to $1,000 even if they owe no taxes. The AOC would replace the Hope Credit, which is a nonrefundable credit of up to $1,800 (in 2009) per student for each of the first two years of college.

Benefits of the proposal

• The AOC generally provides a better tax benefit for qualifying taxpayers than the Hope or Lifetime Learning Credits. The maximum AOC is $2,500 per student; the maximum Hope Credit is $1,800 per student; and the maximum Lifetime Learning Credit is $2,000 per family.
• Forty percent of the AOC is refundable (up to $1,000), unless claimed by a taxpayer who is subject to kiddie tax.

Limitations of the proposal

• The credit is available for the first four years of qualifying education (for other years, taxpayers may be eligible for the Lifetime Learning Credit).
• The credit phases out at MAGI of $80,000-$90,000 ($160,000-$180,000 MFJ). Taxpayers with a MAGI over the phaseout are not eligible for any education tax benefit.

Proposed Changes:

1. Reinstate the 39.6% tax rate for tax years after 2010. Would apply to taxable incomes over $373,650 (adjusted for inflation) for married taxpayers filing jointly, heads of household and single filers.
2. Impose a 36% tax rate to taxable incomes above (generally) $250,000 MFJ and $200,000 for other filers. The 28-percent tax rate bracket would be expanded so that taxpayers earning less than these amounts would not see their taxes rise as a result of the increased tax rate brackets.
3. Reinstate the phaseout of itemized deductions and personal exemptions.
4. 20% tax rate on long-term capital gains.
5. Limit the value of itemized deductions to 28%. Would apply to individuals in the 36 or 39.6% tax brackets.

Current Economic Recovery Payment: A $250 one time payment for individuals who receive Social Security benefits, Railroad Retirement benefits, veterans benefits, or Supplemental Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid institution) in November 2008, December 2008, or January 2009 distributed by paying agency, not via tax return event.

Proposed Economic Recovery Payment (ERP): Eligibility for the ERP is basically the same as for 2009. It appears that individuals who are eligible for Social Security benefits, Railroad Retirement benefits, veterans benefits, or Supplemental Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid institution) at any time during 2010 would receive the ERP distributed by paying agency, not via tax return.

Current Government Retiree Credit: A $250 refundable credit ($500 if both spouses eligible) for individuals receiving retirement benefits from a federal, state, or local government who paid into a government retirement fund instead of Social Security. This credit is claimed via a tax return.

Proposed Government Retiree Credit (GRC): Eligibility for the GRC is basically the same as the current credit, above, for 2009.

1. Offers-in-compromise (OIC) — Eliminate the requirement that initial OIC applications include a partial payment of the balance due. Would apply to OICs submitted after date of enactment.
2. Automatic Enrollment in IRAs
3. Tax Credit for Small Employer Plan Startup Costs — Double the credit for small employers who implement a qualified retirement savings plan.
4. Capital Gains Taxation on Investments in Small Business Stock — Current law allows 50% exclusion for gain on certain small business investments. The proposal would eliminate the tax on qualifying investments purchased after 2/17/2009 (retroactive).
5. Section 179 Expense Deduction — extend 2009 rules for one year (2010) ($250,000 maximum, phaseout begins at $800,000 of qualifying property placed in service during the year).
6. Bonus Depreciation — Extend 2009 rules for one year 2010 (50% depreciation first year property is placed in service).
7. COBRA Health Insurance Premium Assistance — Extend assistance to qualifying individuals through 12/31/2010 and increase eligibility period for individuals qualifying after 2/28/2010 to 12 months.
8. Oil and gas investments — Would eliminate many of the current tax breaks for oil and gas exploration for years after 2010.
9. Increased information reporting — Stricter reporting rules for payments to corporation, rental expenses, etc, designed to reduce the tax gap.

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