Tax Increases for Wealthy to Pay for Social Programs Under Biden’s Proposed American Families Plan

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By: Pooja Srivastava

President Joe Biden proposed The American Families Plan on March 31, 2021. If passed, the policy would increase taxes for wealthy individuals, while providing social benefits programs such as expanded tax credits for low- and middle-income families. The proposal must be approved by Congress before it can become law, and it is likely to change before then.

Biden’s Proposed Tax Changes for Wealthy Citizens

The American Families Plan would raise taxes for wealthy Americans and eliminate certain savings opportunities.

Increasing the top individual rate to 39.6%

Currently, the highest income bracket is taxed at 37%, starting at $523,600 for single filers and $628,301 for joint filers. Biden’s proposed income tax rate of 39.6% for the wealthiest Americans would match the tax rate for this group prior to the Tax Cuts and Jobs Act.

It is not clear whether this tax would apply to taxable or gross income. The thresholds for the top 39.6% income tax rate would likely be $452,800 for single filers and $509,300 for joint filers.

Increasing the top Capital gains rate to 39.6% for income of $1 million or more

Under current law, capital gains from the sale of assets like mutual funds and stocks that are held for at least one year are taxed at rates of 0%, 15%, or 20%, depending on the taxpayer’s income. Individuals currently pay 20% capital gains tax when they earn $473,750 or more per year (single filers) or $501,600 per year (joint filers).

The Biden Administration would instate an additional bracket for Americans making more than $1 million per year, where capital gains would be taxed at 39.6% per year.

expanding 3.8% medicare tax on net investment income (NII) to all unearned income

Certain unearned income is not currently taxed under the 3.8% Medicare tax. President Biden has proposed expanding the Medicare tax to all unearned income.

reversing the step-up in basis for some inherited assets

Currently, the step-up in basis can minimize capital gains taxes on inherited assets. Biden’s proposal would repeal the step-up in basis for inherited assets with capital gains of more than $1 million for single filers and $2 million for joint filers.

like-Kind Exchanges repealed above $500,000

Like-kind or 1031 exchanges enable investors to sell an asset and acquire a similar one without paying capital gains tax on the sale. President Biden’s proposal would repeal like-kind exchanges for gains over $500,000.

section 461(I) loss limitation would become permanent

Originally introduced as a temporary measure in the Tax Cuts and Job Act, The American Families Plan would permanently limit deductions of net business losses over $250,000 for single filers or $500,000 for joint filers.  

$80 billion to support irs audits

New funding would go toward auditing those with over $400,000 in income. Financial institutions would also be required to report new information.

expanded tax credits and social support programs

The American Families Plan would expand tax credits associated with the Affordable Care Act (ACA). Additionally, President Biden would reduce the premiums for health coverage under the ACA. Enrollees would pay up to 8.5% of their income toward coverage, compared to current rates of nearly 10%. Additional premium support would be available for lower income Americans.

Biden’s proposed laws would extend the Child Tax Credit through 2025 and make the credit fully refundable. The law would likewise expand the childcare credit from $2,000 to $3,000 for children six years and older, and $3,600 for children under six. This overlaps with Biden’s goal of having middle- and lower-income families pay less than 7% of their income on childcare for children under five.

President Biden would expand the Earned Income Tax Credit, and the Child and Dependent Care Tax Credit. His policy would also automatically adjust the length and amount of unemployment insurance (UI) benefits available to individuals based on economic conditions.

Paid family and medical leave would also be increased. Under certain circumstances, employers would provide two weeks paid sick leave, ten weeks of family leave, and three days of bereavement leave. By the tenth year of the program, workers would be offered 12 weeks of parental, family, and medical leave.

The American Families Plan would provide four additional years of free education, including two years of pre-kindergarten and two years of community college. Additionally, the Pell Grant award for low-income students would be increased to match higher college costs.

Will the law be enacted?

The American Families Plan is still under review by Congress. If passed, the law may change from its current form and would not take effect until 2022. The plan mostly addresses provisions already set to expire in 2021.

Conclusion

Our accounting professionals will continue to monitor the evolution of the American Families Plan and provide updates as they become available. For specific questions or clarification, contact your trusted Chugh CPAs, LLP professional.