Watch Out for Major Tax Law Changes - the American Families Plan

/ Freidel & Associates, LLC/

President Biden plans on increasing the top individual income tax rate and the capital gains tax rate, taxing carried interests as ordinary income, eliminating stepped-up basis for certain inherited assets, and other tax hikes focused on upper-income taxpayers to pay for his proposed “American Families Plan”.

The plan will include new spending on “human infrastructure” priorities such as paid family and medical leave, universal childcare, access to pre-kindergarten education and free community college, and nutrition assistance programs, along with other tax relief targeted at lower- and middle-income taxpayers.

Revenue Generation – Aka: Increased Taxation

  • Increase the top marginal individual income tax rate to 39.6% for taxpayers (from 37%).

  • Tax long-term capital gains & certain dividends at ordinary rates for households over $1 million, potentially increasing the federal tax burden from 23.8% to 43.4% on this income.

  • Permanently eliminate the carried interest “loophole”.

  • Permanently extend the excess business loss limitation that restricts deducting business losses against non-business income.

  • End the like-kind exchange rules for gains on real property greater than $500,000.

  • Repeal the step-up basis of certain inherited assets that have inherent gains greater than $1 million upon death.

  • Change the 3.8% Medicare tax on net investment income for individuals over $400,000, probably including taxation of certain active business income that isn’t currently taxed.

Notable Campaign Promises Not Included

  • Reinstatement of the “PEASE” limitations, and imposing other limitations on the value of itemized deductions for upper-income taxpayers.

  • Eliminating the 20% qualified business deduction for passthrough income for higher income individuals.

  • Reducing the estate plan exemption and increasing the estate tax rate.

Benefits provided to the Lower- and Middle-Income Taxpayers

  • Permanent extension of the full refundability of the child tax credit.

  • Permanently extend enhancements to the earned income tax credit for childless workers.

  • Permanent extension of the temporary increases to the child and dependent care tax credit.

  • Permanently extend taxpayer-friendly changes to the Affordable Care Act’s health insurance premium tax credit.

From a timing standpoint, it appears that this legislation will probably be in the works for several months while the Senate and House negotiate the precise terms of the legislation.

Don’t expect this to be the final word on tax law changes during 2021. There are significant changes to the corporate income tax and international tax law provisions that are also expected, and which will be posted on separately.