The Biden Administration successfully shepherded the American Rescue Plan Act of 2021 to passage in early March, and on its heels introduced its vision for the future tax and legislative changes via the American Jobs Plan (AJP) and the American Families Plan (AFP). The AJP focuses on addressing the nation’s declining infrastructure issues, while the AFP addresses needed changes to both educational and social programs. Unlike the COVID-19 relief packages passed over the last year, both proposals include an outline of how needed funding will be generated, through tax increases.
The Made in America Tax Plan, included as part of the AJP, focuses on increasing tax rates for international businesses, while the AFP increases tax rates for high net worth individuals. There is significant concern about the AFP due to the proposed tax increases arising from an increase of the top tax rate to 39.6%. Other concerns include more limitations on like-kind exchanges, meaning the tax deferral amount may be further limited, increased efforts to close the carried interest loophole and ensuring those earning over $400,000 are subjected to the Medicare tax. It is almost certain Congressional negotiations will lead to changes as the Plans are turned into legislative language and work their way through the House and Senate. Review key details of the AFP increases below.
Biden Plan Proposed Tax Increases
- Individual Tax Rate Increase – The Tax Cuts and Jobs Act of 2017 (TCJA) made several changes which impacted both individuals and businesses. One of the changes was a reduction of the top tax bracket from 39.6% to 37%. Under the AFP, this reduction would be reversed and return to the prior 39.6% top tax bracket. It is unclear whether there would simply be an increase in the rate or if a corresponding change to income limits would also be made.
- Capital Gains Tax – The AFP calls for an increase of the top capital gains rate from 23.8% to 43.4% while others would be increased to 39.6%. This change is designed to equalize the top tax rates imposed on capital gain income and that imposed on wages from labor.
- Elimination of the Step-Up Basis – There is also a provision which calls for the elimination of a step-up basis upon death for gains more than $1M ($2.5M per couple). There is specific language calling for the gain to be taxed unless the property is donated to a qualified charity. It is important to note that family-owned businesses and farms would be exempt from this change.
- Like-Kind Exchange Limitations – Under the AFP any gains greater than $500,000 would be prohibited from using this powerful tax deferral method. This follows changes which were made as part of the TCJA that limited exchanges to real property only.
- Excess Business Loss Limitations – There is also a provision which calls for a permanent extension of loss limitations designed to restrict large, excess business losses. This change, if passed, will significantly limit the ability of an individual taxpayer to offset income using business losses.
- Carried Interest – The AFP also calls on Congress to end the preferential tax treatment of carried interest. No additional details about how this will be accomplished were provided.
The AFP did not explicitly address estate and gift taxes, however, there have been proposals originating in both the Senate and House to address the issue, including:
- For the 99.5% Act – Introduced by Senator Bernie Sanders, the legislation increases the marginal estate tax rates and reduces the exemption from $11.7M to $3.5M per decedent. In addition, the gift tax exemption would be reduced by 91% from $11.7M to $1M. The Act calls for estate sizes between $3.5M to less than $10M to be subjected to a 45% tax, $10M to less than $50M subjected to a 50% tax rate, $50M to less than $1B subjected to a 55% tax and $1B or more subjected to a 65% tax. There would also be changes limiting the tax saving opportunities available through grantor and generation skipping trusts.
- Deemed Realization Proposal (HR 266) – Introduced by Chairman of the House Ways and Means Committee, Rep. Bill Pascal, is designed to tax the capital gains of the ultra-wealthy upon the transfer of property. Key components include treating the transfer of property by gift or at death as sale of the property, a $1M exclusion on transfers, imposes certain information reporting requirements and outlines special rules for transfers in trusts.
The Biden Tax Plan is focused on increasing taxes on businesses and high net worth taxpayers to pay for the ambitious infrastructure and education plans. The additional proposal originating in Congress creates an additional layer of complexity to the several important revisions. If you have questions about the information outlined above or need assistance with another tax or accounting issue, we can help. For additional information call us at 248-208-8860 or reach out today. We look forward to speaking with you soon.