President Biden Proposes Individual Tax Changes in American Families Plan

On April 28, 2021, President Joe Biden announced the $1.8 trillion American Families Plan, a proposal aimed at supporting Americans in childcare, education, family leave, and more. There are several tax provisions included in the plan ranging from targeted tax cuts for certain taxpayers to significant tax increases for other taxpayers. These individual tax increases, amounting to $1.5 trillion, are intended to fund the plan.

At this time, there are no formal legislative actions or bills related to this proposal, and it’s likely that the components of this proposal will change during the legislative process. However, the proposed changes could have a significant impact on individuals. Here’s a closer look at the proposed income tax changes in the American Families Plan.

Proposed Tax Cuts

Extend the Expanded ACA Premiums Tax Credit

The American Rescue Plan Act (ARPA), signed into law on March 11, 2021, included a provision that provided for two years of lower health insurance premiums via an expanded premium tax credit for those that buy coverage on their own. The American Families Plan will make those premium tax credits permanent.

Extend the Increased Child Tax Credit

ARPA expanded the child tax credit from $2,000 per child to $3,000 per child for children six years and older ($3,600 per child under six). Additionally, it made 17-year olds eligible for the credit and provided for the credit to be fully refundable. Another significant component of the increased child tax credit is that it will be delivered to families throughout the year as a prepayment of the credit.

The American Families Plan will make the full refundability of the child tax credit permanent and will extend the other expansions to the child tax credit through 2025.

Permanent Increase for the Expansion of the Child and Dependent Care Tax Credit

ARPA expanded the child and dependent care tax credit to allow for families to receive a tax credit for as much as half of their spending on child care for children under age 13 up to a maximum of $4,000 per child or $8,000 for two or more children (phased out for families making $125,000 or more up to $400,000) for 2020. The American Families Plan will make this expanded credit permanent.

Permanent Increase for the Expansion of the Earned Income Tax Credit for Childless Workers

ARPA tripled the earned income tax credit for childless workers for 2020. The American Families Plan will make this expansion permanent.

Proposed Tax Increases

Increase the Top Tax Rate for Individuals

The American Families Plan will increase the top tax rate from 37% to 39.6%. This would apply to income in excess of $523,600 for single returns (or $628,300 for joint returns) based on current taxable income brackets.

Reform Capital Gains Taxation

The American Families Plan will increase the capital gains tax rate for households making more than $1 million. Instead of paying the lower, preferential tax rates on long-term capital gains and qualified dividend income (currently 20%), such income will be subject to ordinary income tax rates of up to 39.6%.

Modification of Estate Tax

The American Families Plan will modify the estate tax to eliminate “stepped-up” basis in inherited assets for gains in excess of $1 million per person and ensure the gains are taxed if they are not donated to charity. There will be protections related to family-owned businesses and farms, but there are no details related to those provisions.

Eliminate Carried Interest

The American Families Plan also proposes to eliminate carried interest to ensure that hedge fund partners will pay ordinary income rates on their income. It is not clear how they intend to limit the application of this provision to hedge funds.

Limit Like-Kind Exchanges on Real Estate

The American Families Plan will eliminate the ability to defer real estate gains in excess of $500,000 via like-kind exchange transactions.

Permanent Limitation on Use of Business Losses

The American Families Plan will make the disallowance of “excess business losses” permanent.  This limitation is currently scheduled to sunset after 2025.

Eliminate Inconsistencies With the Additional Medicare Tax

The American Families Plan will eliminate inconsistencies with the application of the net investment income tax, which is a 3.8% tax imposed on certain investment income. The specific target of these inconsistencies is for households making over $400,000. There has been no discussion around what inconsistencies are being specifically targeted.

What This Means for Taxpayers

As the plan progresses through Congress, taxpayers should continue to monitor developments, especially as they pertain to the timing of capital gain transactions and current estate plans. However, because details are still unknown – including potential enactment dates – and not everything being proposed will become law, caution should be taken before reacting to these proposals.

We’ll continue to monitor the situation and will provide updates. Please reach out to your KSM advisor with any questions or complete this form.