AMERICAN FAMILIES PLAN
On April 28, 2021, the Biden White House released a fact sheet describing the "American Families Plan," which seeks to raise $1.5 trillion in revenue from wealthy taxpayers to cover new subsidies for families and workers. The tax proposals in the American Families Plan are laid out below.
RAISE THE TOP PERSONAL INCOME-TAX RATE
Current Law The highest personal income tax rate is 37%, which was enacted as part of 2017's Tax Cuts and Jobs Act (TCJA). Pre-TCJA, the highest personal income tax was 39.6%.
Taxpayers falling within the current top rate of 37% in 2021:
- Single filers with taxable income over $523,600
- Joint filers with taxable income over $628,300
- Married couples filing separate (MFS) returns with taxable income over $314,150
- Head-of-household filers with taxable income over $523,600
Biden Administration Proposal The American Families Plan would reverse the TCJA's rate change and bring the top rate back up to 39.6%.
President Biden has said he will not raise taxes on anyone making less than $400,000 per year, so it is not clear (given the MFS current top-rate gate above) whether the proposal will raise rates for taxpayers who are married and filing separately earning between $314,150 and $400,000.
INCREASE CAPITAL-GAINS RATE FOR TAXPAYERS EARNING $1,000,000 OR MORE
Current Law Rates applicable to long-term capital gains, i.e., gains from the sale of stocks, mutual funds, and other capital assets held for at least one year, are taxed at a 0%, 15%, or 20% rate, depending on the amount of the taxpayer's taxable income. The 20% rate applies to single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600. Short-term capital gains are taxed at the same rate as ordinary taxable income.
>Biden Administration Proposal Taxpayers with taxable income over $1,000,000 would pay tax at the ordinary income rate of 39.6% on their longterm capital gains, thus eliminating the reduction in tax for capital gains. This rate increase is almost double the current top rate on long-term capital gains.
Those taxpayers with over $1,000,000 in taxable income would also see an application of the 3.8% Medicare tax on net investment income (NII) in Section 1411, bringing the top rate for such taxpayers' long-term capital gains to 43.4%.
With the addition of state and local capital-gains taxes, taxpayers with over $1,000,000 in taxable income could be paying long-term capital-gains taxes at a combined rate of over 58%, depending on where they live.
ELIMINATE THE BASIS STEP-UP FOR INHERITED PROPERTY
Current Law Taxpayers receive a basis step-up to fair market value on stock, real estate, and other capital assets inherited from an estate. In essence, this basis step-up allows the imbedded increase in fair market value to avoid capital-gains tax.
Biden Administration Proposal Calls for the nullification of the basis step-up effects for gains of $1,000,000 or more ($2,000,000 or more for married couples filing a joint return).
The specifics for how this would be accomplished are not entirely clear, but it appears the property would carry a tax obligation in the amount of embedded gain at time of death, with the tax liability falling on the estate. A previous proposal to limit the stepped-up basis, the Sensible Taxation and Equity Promotion (STEP) Act of 2021, gave families up to 15 years to pay the taxes owed on certain assets.
Exceptions would be carved out for property donated to charity and certain family-owned businesses and farms that heirs continue to operate.
ELIMINATE CARRIED-INTEREST ELIGIBILITY FOR LONG-TERM CAPITAL-GAINS RATES
Current Law Under certain circumstances, an investment fund manager can treat "carried interest," which is essentially earned income from fund management, as long-term capital gain. This treatment allows the income to be taxed at long-term capital-gains rates, which are currently considerably lower than ordinary income rates.
Biden Administration Proposal Eliminate the carried-interest rules. If the fund manager's taxable income is over the threshold for the top income tax rate, the tax on the fund manager's carried-interest income could go from a rate of 23.8% (20% capital gain rate + 3.8% surtax on NII) to 43.4% (39.6% ordinary tax rate + 3.8% surtax on NII).
LIMIT AVAILABILITY OF LIKE-KIND (SECTION 1031) EXCHANGE TREATMENT
Current Law Tax gain or loss can be deferred on exchanges of real property used for business or held as an investment for "like-kind" property. Properties are of like kind if they are of the same character. This is the case regardless of whether the properties differ in size or value.
Biden Administration Proposal Eliminate likekind exchange treatment for gains greater than $500,000. This change would apply regardless of a taxpayer's taxable income.
MAKE BUSINESS LOSSLIMITATION RULE PERMANENT
Current Law Under the TCJA (Section 461(l)), individuals operating a trade or business and filing a Schedule C cannot deduct losses in excess of $250,000 ($500,000 for joint filers). Excess losses may be carried forward to future tax years. This loss-limitation rule is currently set to expire in 2027.
Biden Administration Proposal Make permanent the business loss-limitation rule.
Originally Published 18 May 2021