Published by Richard Shapiro Apr 29, 2021
Thumbnail: Kelly Sikkema
On April 28, 2021, President Biden unveiled his $1.8 trillion American Families Plan, a ten-year plan of increased federal government support of education, child care, paid leave, nutrition and families. Whereas the President’s infrastructure proposal would be paid for, in part, by corporate tax increases, the American Families Plan would be substantially funded by tax increases, principally on wealthy taxpayers, and by improved tax compliance.
While most of the details have yet to be provided, the tax plan includes the following:
The highest federal individual income tax rate would be increased to 39.6% from 37%.
Capital gains and dividends would be taxed at ordinary income tax rates (i.e., like compensation income) for households making over $1 million. The 3.8% investment income (Medicare) tax would be added, resulting in a 43.4% federal income tax on such income. (That income would continue to be subject to state and local income tax, which could make the effective tax liability on such income even higher.)
“Step-up in basis” on transfers to heirs – which allows estates to revalue assets to fair market value at the time of inheritance for purposes of later sales – would be eliminated for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions).
This would not apply to donations to charity.
This change would be “designed with protections” so that family-owned businesses and farms would not have to pay taxes when given to heirs who continue to run the business.
“Carried interests” would be subject to ordinary income taxation.
The deferral of tax on “like-kind” exchanges of real estate – for gains greater than $500,000 – would be eliminated.
The limitation on the deduction of large “excess business losses” would be made permanent.
The application of the 3.8% investment income (Medicare) tax would be changed to ensure that it is applied consistently to those making over $400,000.
Substantial additional funding would be provided to the IRS, leading to better compliance, additional information reporting, overhauling outdated technological infrastructure and regulating paid tax preparers.
The Child Tax Credit increases in the American Rescue Plan would be extended through 2025 and the Child Tax Credit would be permanently fully refundable.
The temporary Child and Dependent Care Tax Credit expansion enacted as part of the American Rescue Plan would be made permanent.
The Earned Income Tax Credit expansion for childless workers would be made permanent.
No effective dates for these provisions have yet been proposed.
Not included in the plan are any changes to the $10,000 limitation on state and local tax deductions or an increase in the estate tax rate (top bracket currently 40%) or a lowering of the estate tax exemption amount ($11.7 million in 2021).
As this plan is discussed and debated in the weeks and months ahead, considerable changes are likely to be made.
Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has more than 40 years' experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international.
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