On January 20, President Obama delivered the annual State of the Union address and, among other topics, discussed the White House’s tax reform proposal. The proposal offers several tax credits and benefits for middle income Americans while levying a tax on large financial institutions, increasing the capital gains rate on high income Americans and limiting stepped-up basis for inherited and gifted assets.

President Obama’s tax reform proposal offers several tax benefits for middle income Americans. For example, the President proposes to create a second earner tax credit of up to $500 for the lower earning spouse in married couples with earnings of up to $120,000. The White House’s plan would also triple the maximum child and dependent care tax credit for families with preschool-age children and would eliminate child care flexible spending accounts to pay for the credit increase. The President’s proposal also doubles the earned income tax credit for workers without children, requires businesses with more than 10 employees to automatically enroll workers in an IRA if the business does not offer a retirement plan, and it expands and makes permanent the American Opportunity Tax Credit.

To pay for these measures, the President’s plan imposes a tax on large financial institutions and increases taxes on high income Americans. In particular, the White House plan imposes a 7 basis point fee on the liabilities of US financial institutions with assets over $50 billion. The President also proposes to increase the capital gains rate to 28% on couples who file jointly and have incomes over $500,000. Additionally, the President’s plan eliminates stepped up basis for bequests and gifts of assets with capital gains of more than $200,000 per couple ($100,000 per individual).