In his State of the Union address, President Obama outlined two proposals - a minimum wage increase and an Earned Income Tax Credit (EITC) expansion - that could boost workers' wages and stimulate the economy. At the same time, they come with potential tax implications, which vary greatly depending on one's income and household size. Here's what taxpayers should consider as Washington debates these proposals.

An Increase in the Minimum Wage

President Obama has long urged Congress to pass a bill to increase the minimum wage, which is currently $7.25 an hour. For one segment of workers, he has already taken the matter into his own hands. The day after his State of the Union address, he issued an executive order requiring federal contractors to pay their federally funded employees at least $10.10 an hour. Two congressmen, Senator Tom Harkin of Iowa and Representative George Miller of California, have sponsored a bill that would incrementally raise the minimum wage to the same rate by 2016. The bill also includes a provision to increase the minimum wage annually to correspond with rising costs of living.

The tax implications of this increase would vary greatly depending on one's household income. Without adjustments to the eligibility criteria for tax credits and assistance programs, minimum-wage workers could see their effective marginal tax rates increase. Workers with incomes between 100% and 150% of federal poverty guidelines - or, roughly, between $15,000 and $23,000 a year - face effective marginal tax rates of more than 60%, according to the Congressional Budget Office. (A full-time worker making the proposed minimum wage would earn just over $21,000 a year.) Outside of that range, however, the marginal tax rate is not nearly as onerous. The average effective marginal tax rate for low- to moderate-income workers, according to the CBO, is 32%. (The CBO defines low- and moderate-income workers as those whose household income falls below 450% of federal poverty guidelines.)

Workers who earn above the minimum wage, however, could see ancillary benefits. According to the Economic Policy Institute, an ultimate wage increase to $10.10 an hour by 2016 would indirectly boost the income of 11.1 million workers, in addition to the 16.7 million workers who would receive an obligatory wage increase. For those above the threshold for federal assistance programs such as Medicaid, the increased wages would also have less effect on their tax rates.

Chances of passage: The odds are long, given that economists are sharply divided on whether a minimum-wage increase would threaten businesses and impede job creation.

The Earned Income Tax Credit (EITC)

In addition to advocating for a mandate to increase wages, President Obama endorsed an expansion of the Earned Income Tax Credit during his address. Currently, he said, the EITC provides tax relief for nearly half of all parents in the U.S. However, very few single taxpayers without children are eligible for the credit. Such workers must have adjusted gross income of no more than $14,340 a year to receive the credit. The current threshold eliminates a large portion of single workers: even a person working full-time at minimum wage would not qualify. Obama called for adjustments that would allow more single, childless filers to claim the credit.

So far, it is unclear exactly how such an expansion, if passed, would take shape. Senator Marco Rubio of Florida, who President Obama mentioned in his remarks on the EITC, has supported an alternative plan that would replace the EITC with wage subsidies for a broad group of low-income workers. The Brookings Institution, a Washington think tank, has proposed a plan that would extend eligibility for the credit to childless workers over age 21, reduce penalties for married taxpayers and increase benefits for families with children under age 6. However, it would also cap the threshold for eligibility to households under 200% of federal poverty guidelines.

Both plans would potentially reduce - or even eliminate - benefits for middle-class families, many of which are currently eligible for the EITC. Additionally, neither of them would benefit those who also have earnings from investments. Under the EITC's current guidelines, taxpayers who earn more than $3,300 in annual investment income cannot claim the credit.

Chances of passage: The EITC has broad bipartisan support, but expanding it (in contrast to increasing the minimum wage) would require additional federal funding, which presents a significant obstacle.

Bottom Line

If it passes, an increase in the minimum wage could benefit both low- and middle-income workers. The current ideas being brought forth to reform the EITC, however, would have little benefit for middle-income workers.

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