Obama's Tax Plan: 5 Things To Know Ahead Of The State Of The Union Address

President Barack Obama is expected to use the State of the Union address to announce his plan to overhaul the tax system in part by closing the so-called trust fund loophole that affects the wealthiest Americans and giving tax credits to middle-class households with spouses who work. The tax proposal also includes raising the top rates on capital gains and dividend rates and making it more expensive for the biggest financial firms to borrow money.

“By ensuring those at the top pay their fair share in taxes, the president’s plan responsibly pays for investments we need to help middle-class families get ahead, like his recent proposal to make two years of community college free for every student willing to do the work,” according to the White House. “The savings will pay for additional reforms that will help the paychecks of middle-class and working families go further to cover the cost of child care, college and a secure retirement.”

Here are five things to know about the president’s tax plan:

1) It mostly affects the richest Americans

The top 1 percent of American earners will feel 99 percent of the impact of the president’s plan, according to the White House. “Under the president’s proposal, wealthy people would still get a preferential rate on their income from investments, but they would no longer be able to accumulate extra wealth by paying no capital gains tax whatsoever,” the administration said.

2) It's virtually certain the plan won't become law

Obama needs the Republican-controlled Congress to pass his tax agenda, and that simply won’t happen. The announcement is more about politics and casting the GOP as the party of the rich, according to the Washington Post. The president’s former speech writer, Jon Favreau, also pointed this out in a tweet over the weekend:

3) It helps middle-class earners without an employer-backed 401(k) save for retirement

Companies with at least 11 employees would have to automatically enroll their workers in an individual retirement account (IRA.) Staff members can opt out of the plans, but businesses with fewer than 100 employees would receive a $3,000 tax credit for offering the retirement funding vehicles.

4) The tax hikes for the rich will go toward tax breaks for the middle class

Obama’s plan includes $320 billion in tax increases to pay for $235 billion in tax breaks, the Wall Street Journal reported.

5) Capital gains and dividends will be taxed at 28 percent

That would be the highest rate since it was 28 percent under President Ronald Reagan in the 1980s. The top rate under Obama’s plan would apply to couples making more than $500,000 a year.