What the State of the Union means for your wallet

Wed Jan 25, 2012 4:55pm EST

U.S. President Barack Obama (C) delivers his State of the Union address, January 24, 2012.

U.S. President Barack Obama (C) delivers his State of the Union address, January 24, 2012.

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(Reuters) - While Americans might get a little break in their payroll taxes through the end of this year, greater financial relief for workers will be elusive. After the State of the Union speech by President Obama on Tuesday night, it's clear that the wizard will still be hiding behind the curtain.

The best evidence of this was when President Obama invoked the progressive intent of the proposed Buffett rule to tax millionaires at a minimum 30 percent rate marginal rate - about twice the effective rate that Mitt Romney, the GOP presidential candidate, has paid in recent years.

It was obvious from the antarctic glare of House Majority leader Eric Cantor and the twitchiness of Speaker John Boehner that President Obama had a better chance of launching a mission to Mars in this caustic election year than gaining any ground on progressive tax reforms.

It's not that President Obama didn't hit grace notes for bolstering his platform. Next to job creation, income inequality and tax fairness were near the top of his agenda.

"We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by," Obama said. "Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules."

Despite his bully pulpitting, the most likely outcome for the next year is that most of the president's proposals mentioned in the State of the Union speech will be benched in the Congressional bullpen. Since House leaders wouldn't even touch his jobs bill last year - which offered some minor paring of write-offs for the ultra-wealthy - populist tax reforms will likely be shelved until 2013 and beyond.

A do-nothing Congress will actually have a great impact. Unless both houses act by the end of the year, all of the Bush-era tax cuts and interim lower rates on estate taxes will automatically expire. Here's what might happen if Congress is deadlocked:

* On January 1, 2013, the top marginal federal income tax rate will rise more than 13 percent - from 35 percent to 39.6 percent.

* The top tax rate on long-term capital gains will go from 15 percent to 20 percent - a 33 percent increase.

* The maximum tax rate on dividend income, now capped at 15 percent, will rise to 39.6 percent - a 164 percent hike. That means dividends will be taxed like ordinary income.

* The marriage penalty would return in 2013. The standard deduction for married taxpayers would no longer be calculated as 200 percent of the amount for unmarried filers; it would return to about 167 percent of the unmarried rate.

* The estate-tax exemption is scheduled to fall from $5 million back to $1 million, while the maximum estate-tax rate is scheduled to rise to 55 percent.

Depending on your point of view, a congressional logjam would either be a restoration of the tax code's progressiveness and a partial antidote to the government's budget deficit problems - or the mother of all tax increases. Neither the president nor his opponents have addressed this outcome in public.

For college students and parents, there was a hint of relief if Congress can extend or expand a tuition tax credit and link federal research dollar allocations to curbing tuition increases. And "doubling the number of work-study jobs in the next five years" wouldn't hurt either, as the president proposed, although it's small beer compared to the current crippling cost of college, which no politician seems to be able to remedy.

One intriguing idea, offered without any details, was a plan to allow homeowners to refinance at low rates. "I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates," Obama said with no elaboration.

Does this mean loosening the standards by which mortgage giants Freddie Mac and Fannie Mae buy loans? By "responsible homeowners," did he mean those who don't qualify for mortgages because their credit scores are not high enough or the one in five distressed homeowners whose mortgage balances now exceed the value of their homes?

Since Freddie and Fannie are wards of the state due to their 2008 takeover by the government, this might be doable. Or the administration could expand its homeowner aid and foreclosure prevention programs, which have been huge disappointments in stopping mortgage defaults.

No matter which scenario you buy, you'll need to have a solid conversation with your tax planner well in advance of the election. The yellow-brick road that leads to the November plebiscite is full of perils.

(Editing by Beth Pinsker Gladstone)

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