Following enactment of the recent American Rescue Plan (ARP) for COVID-19 relief and a major infrastructure proposal, the Biden Administration moves ahead with another initiative for families. Biden introduced the “American Families Plan” (AFP) on April 28, 2021, offering a focused effort on families that is funded mostly by individual tax increases. The President will cover this proposal later tonight (4/28/2021) in a major address before Congress. As stated in a White House Fact Sheet released today, this proposal addresses investments in families, children, and the economy in general.
The AFP, along with the infrastructure plan rolled out last month, are part of the Administration’s “Build Back Better” program it initially announced last year. The infrastructure plan focuses on spending for roads, bridges, energy, and more, while this latest plan looks to provide assistance and relief to families. The infrastructure proposal is funded through higher taxes imposed on businesses, while the American Families Plan will be paid for with tax hikes on individuals.
The AFP offers $1.8 trillion over a 10-year period. This is made up of $1 trillion invested in certain programs, and $800 billion earmarked for relief to families and workers. Some of the $1 trillion in programs will go to free college education, universal pre-school for three and four-year olds, assistance for teachers, support for childcare, paid leave programs, nutrition plans, and unemployment insurance reform.
The $800 billion in tax relief for families will consist of the following items:
- Make permanent the Affordable Care Act (ACA) health care premiums that were part of the recent ARP.
- Extend the ARP Child Tax Credit increases from $2,000 to $3,000 (and $3,600 for children under age six) through 2025. Make the Child Tax Credit permanently fully refundable.
- Make permanent the increased limits for childcare incentives, under the ARP. The childcare tax credit for one child was increased to $4,000 and to $8,000 for two or more children.
- Expand the Earned Income Tax Credit (EITC) by preserving the recent changes for childless workers.
Tax Increases to Fund the American Families Plan
The administration plans to pay for the AFP with higher individual taxes. The AFP indicates that tax hike on individuals will amount to $1.5 trillion over the 10-year period. Several of the proposed individual tax increases are as follows:
- Higher Enforcement on Wealthy Taxpayers. The plan will increase the IRS budget with the objective to then increase tax audits and enforcement on higher income taxpayers. The AFP indicates this will raise over $700 billion – nearly half of the proposed tax increases. Click here for a summary on enforcement issues, released today by the Treasury Department.
- Raises the Top Tax Rate for Individuals from 37% to 39.6%. It is not clear exactly what taxable income levels will be changed. This amounts to an increase in tax of approximately 7%.
- Increases the Tax Rate on Capital Gains and Qualified Dividends. This increase would apply for individuals making over $1,000,000 in a year. Capital gains and dividends, instead of being taxed at a rate of 20%, would be taxed as ordinary income at the new 39.6% tax rate. As capital gains and dividends are also subject to the ACA’s Net Investment Income Tax (NIIT) of 3.8 %, capital gains and dividends for those with income over $1,000,000 will be taxed at 43.4% (nearly double the rate of what they are now).
- Step-Up in Basis. As you may know, when an individual dies, the tax law permits property to receive a step-up in basis to the value on the date of death. Therefore, there is no capital gains tax when the property is later sold by the heirs. The AFP would end this step-up in basis, and the capital gain would presumably be deferred until the property is later sold by the heirs. An exemption of $1,000,000 would still apply for a step-up, as well as the $500,000 exclusion on a principal residence. Exemptions are available for gifts to charities, too, and there is still relief for family-owned businesses and farms. There have not been any details provided on how this family business or farm exception would be structured.
- Like-Kind Exchange for Real Estate Not Treated as Kindly. The AFP would stop the special tax incentive used in real estate of a like-kind exchange when property is sold or disposed. The AFP would end this tax relief for gains greater than $500,000. It is uncertain if this $500,000 is per property, per year, or something else entirely.
- Limitation on Excess Losses. Recent tax law changes imposed a limitation for $500,000 (for married taxpayers filing jointly and $250,000 for others) on large losses for taxpayers, but this limitation would expire in 2026. The AFP would make this loss limitation permanent.
- Carried Interests. Carried interests were employed by private equity firms and other investors in the past to obtain capital gain income, rather than ordinary income, on certain investments. The AFP would treat a carried interest as ordinary income and not as capital gain.
- NIIT Tax Expanded. The ACA established a 3.8% Medicare surtax on NIIT. This surtax applied on investment or portfolio income but did not apply to business income. The AFP would apply it on all types of income to those earning over $400,000.
The above tax proposals are just that – proposals. They now need to move to Congress, where the legislation is drafted. Changes to the above may be made, other items may be added or modified, and effective dates will be determined. As there was talk of several other tax changes that did not end up in the AFP proposal, these changes could surface later as the process unfolds in Congress. For your reference, the following WERE NOT part of the AFP proposal:
- Curb on Itemized Deductions. There was talk that itemized deductions might be limited to a lower tax bracket or scaled back in some fashion.
- SALT Deduction Expanded. Recent legislation imposed a limitation of $10,000 on the deduction for state and local taxes. There has been discussion on removing this limitation or increasing the $10,000 threshold.
- Qualified Business Income Deduction of 20% (Section 199A). There was speculation that the 20% deduction for certain businesses would be eliminated or reduced for those with higher income.
- Estate Tax Changes. There was also talk of reducing the estate tax exemption and raising the estate tax rate. However, the only estate item in the proposal was the reduction on the “step-up in basis” (addressed above).
Stay tuned as we see how the American Families Plan progresses through Congress. Please contact you Sikich advisor with any questions impacting you, your family, or your business.