There's more to Obama's and McCain's proposals than simply raising or lowering rates. By Mary Beth Franklin, Senior Editor October 27, 2008 Presidential candidates John McCain and Barack Obama have distinctly different ideas about tax policy, and depending on your income and investments, you could be a winner or loser under their proposed tax plans. But it's hard to figure out who would be helped or hurt just by listening to their campaign ads.Just ask "Joe the Plumber", the Ohio tradesman who was thrust into the national spotlight after McCain repeatedly referred to him during the final presidential debate as an example of how the average Joe would fare under their competing platforms. It turns out that Samuel Joseph Wurzelbacher, aka "Joe the plumber" of suburban Toledo, Ohio, doesn't make enough money to be adversely affected by Obama's tax proposal that would raise rates only on high-income taxpayers. Despite their philosophical differences, the nation's ongoing financial crisis has prompted the two candidates to agree on one tax issue: suspending the requirement that seniors over age 70 tap their retirement accounts. While that would allow some investors to avoid selling stocks hammered by the market, it would only help those affluent seniors who can afford to skip their annual required minimum distribution. Seniors who need the money will have to tap their IRAs whether or not they are required to do so. Obama would also exempt from taxation any withdrawals up to the required minimum amount. Tapping retirement accounts As Americans grapple with rising consumer prices, falling home values and shrinking 401(k) balances, some are breaking into their retirement nest eggs to make ends meet. In response, both candidates outlined proposals to ease the tax bite of tapping retirement accounts early. Unfortunately, their proposed plans could have serious long-term implications for many workers who are already woefully unprepared for retirement. Advertisement McCain recently proposed that savers should be able to withdraw up to $50,000 from their IRAs or 401(k) plans and pay the lowest income tax rate -- 10% -- on those withdrawals in 2008 and 2009. Currently, retirement account withdrawals are taxed at ordinary income tax rates from 10% to 35% and taxpayers younger than 59 ½ pay an additional 10% penalty on early withdrawals. Earlier, Obama suggested that savers be allowed to withdraw 15% of their retirement savings up to maximum $10,000 in 2008 and 2009 without paying a penalty, but still subject to income taxes. Under current law, workers can borrow up to half of the balance in their 401(k) or similar workplace-based retirement plans up to $50,000 and in some cases, qualify for a hardship withdrawal, subject to taxes and early distribution penalties. You can't borrow from an IRA, but you can take early withdrawals that will be taxed and penalized. Roth IRA contributions (but not earnings) can be withdrawn any time tax-free and penalty free. Tax plan overview In general, McCain prefers to extend the current tax rates, due to expire in 2010, and recently revised his position on maintaining the existing low rates on capital gains and dividends. He now suggests that the capital gains rate temporarily be cut in half from 15% to 7.5%, but made no mention of that fact that taxpayers in the two lowest income tax brackets already qualify for a zero capital gains rate through 2010. His tax policy would primarily benefit those with higher incomes, according to an analysis by the nonpartisan Tax Policy Center, in Washington, D.C. In contrast, Obama's plan would benefit mainly low- and middle-income taxpayers and would increase taxes on high-income taxpayers, defined as families with incomes of more than $250,000 ($200,000 for individuals). Advertisement Obama proposes a windfall-profits tax on oil companies and would use the revenue to give filers an immediate $1,000 rebate to help cope with higher fuel costs. He would add a refundable tax credit of up to $500 per person ($1,000 per family) to offset payroll taxes on the first $8,100 of wages. He would also exempt seniors with incomes of less than $50,000 from income taxes, create a mortgage-interest credit for homeowners who don't itemize deductions and replace existing college-tuition subsidies with a refundable tax credit. Both candidates propose to protect middle-income Americans from the alternative minimum tax, a parallel tax system enacted in 1969 to ensure that the rich pay at least some tax. Because the AMT was never indexed to inflation, it now threatens to saddle tens of millions of middle-income Americans with higher taxes. As part of the $700 billion economic rescue plan, Congress approved another one-year patch boosting the AMT exemption amount to keep more than 21 million new middle-class taxpayers from paying the tax in 2008. On estate taxes -- which at the federal level apply to only a small number of wealthy Americans -- the differences between the two are huge. Obama would maintain the estate-tax exclusion and rate at 2009 levels, while McCain would boost the exclusion and slash the tax rate. If Obama wins in November, his proposals stand at least a fair chance of passage, particularly should Democrats gain a filibuster-proof majority of 60 seats in the Senate. If McCain wins, he would need to wheel and deal with a Congress likely to be controlled by the Democrats. Regardless of who wins, however, the ongoing federal budget deficit will make it difficult for the next president to fulfill many expensive campaign promises. McCain vs. Obama: The proposals Confused by how the proposals of the two candidates for president would affect your tax bill? This comparison, drawn from official documents, lays out their major ideas. Advertisement INCOME TAX McCain: Maintain current tax rates of 10% to 35%. Obama: Boost top tax rate to 39.6% on joint income more than $250,000. CAPITAL GAINS/DIVIDENDS Advertisement McCain: Temporarily reduce the maximum rate from 15% to 7.5% Obama: Raise maximum to 20%, but only for investors with incomes more than $250,000. RETIREMENT ACCOUNTS McCain: Suspend mandatory distributions for those 70 ½ and older. Permit early withdrawals from retirement accounts of up to $50,000 and cut maximum tax on distributions to 10% in 2008 and 2009. Obama: Suspend mandatory distributions for those 70 ½ and older. Permit taxpayers to withdraw up to $10,000 from retirement accounts penalty-free but still subject to income taxes. NEW TAX CUTS McCain: Immediately double the dependency exemption to $7,000 for married couples with incomes less than $50,000; gradually increase it for higher earners. Obama: $1,000 rebate to offset high energy costs; up to $1,000 credit to offset Social Security taxes for low wage earners; eliminate income tax for seniors making less than $50,000; double college credit to $4,000. AMT McCain: Maintain current exemption and index to inflation. Obama: Maintain current exemption and index to inflation. ESTATE TAX McCain: Raise exclusion to $5 million per person; cut rate to 15%. Obama: Set exclusion at $3.5 million per person; keep rate at 45%. SOCIAL SECURITY McCain: No change in taxable wage base. Obama: Impose added tax on earnings exceeding $250,000. CORPORATE TAX McCain: Reduce top rate to 25%; close corporate loopholes. Obama: Keep top rate at 35%; close corporate loopholes. For more details on the candidates' tax plans read the Tax Policy Center's longer analysis. ALSO SEE: Where They Stand on Health Care.