TAX ALERT | April 28, 2021 | Authored by RSM US LLP
On April 28, 2021, President Biden introduced The American Families Plan (the Families Plan). The Families Plan is estimated to cost $1.8 trillion according to a White House summary. The Families Plan sets forth the administration’s initiatives that they believe will grow the middle class, expand the benefits of economic growth to all Americans and leave the US more competitive. The Families Plan initiatives focus on the following broad areas:
To pay for the Families Plan, President Biden proposed numerous tax changes. At a high level, the Families Plan would be offset with $1.5 trillion in revenue raisers that would primarily impact high-income individual taxpayers: Those revenue provisions would include:
Washington National Tax has summarized the key tax provisions of the Families Plan.
The President’s proposal would increase the top marginal rate on ordinary income from 37% to 39.6%. According to the White House summary, this rate increase would only affect the top 1% of taxpayers, and would apply to income such as interest, wages and income from flow through investments and other businesses.
Capital gains and qualified dividends are currently taxed at a maximum preferential rate of 20%. The administration’s proposal would eliminate these preferential rates for taxpayers with incomes of greater than $1 million, and instead subject this income to ordinary income tax rates. The White House summary indicates that this change would impact the top 0.3% of taxpayers.
Under current law, certain types of income earned by high-income workers and investors are subject to an additional 3.8% tax. This generally takes the form of either the self-employment tax, additional Medicare tax or the net investment income tax, depending on the nature of the income. But these regimes do not capture all income. The President’s proposal appears aimed at eliminating the exceptions in order to ensure that taxpayers earning more than $400,000 would incur this 3.8% tax on all income – regardless of the source. For taxpayers already in the proposed 39.6% bracket, this proposal would push the nominal marginal federal tax rate on all income to 43.4%.
To eliminate a taxpayer’s ability to avoid the increase in capital gains rates noted earlier by holding assets until death, the proposal would require taxation of all unrealized gains in excess of $1 million as of the date of death. The only exception to recognition would be for appreciation attributable to assets donated to charity. The summary indicates that the reform will be designed to ensure that Families owned businesses and farms would be protected and that no tax would be triggered when those businesses are transferred to heirs that continue to run the businesses.
Specifically calling out the hedge fund industry, the administration called for closing the ’carried interest loophole.’ Under current law, fund managers are sometimes able to enjoy preferential capital gains rates on their share of income from the fund, despite the fact that the income may effectively represent compensation for the manager’s services.
The tax law currently allows for the deferral of gains on transfers of real estate in situations where the taxpayer exchanges into other like-kind property. The proposal calls for an elimination of this deferral mechanism in circumstances where the gain exceeds $500,000. This would effectively eliminate the like-kind exchange in most circumstances.
In 2017, the Tax Cuts and Jobs Act limited the ability of taxpayers to deduct ‘excess business losses’ against other types of income – capping the allowable net deduction to $500,000 per year. This provision was originally set to expire. Under the President’s plan, this provision would be made permanent.
President Biden’s office estimates that the overhaul of tax administration will generate approximately $700 billion in tax revenue over the course of a decade, net of investments made. The key components of the American Families Plan proposals include:
The provisions outlined above would undoubtedly have profound implications for high-income taxpayers and business owners. The journey from proposal to legislation to law can be a long one – and it is reasonable to expect that there will be significant negotiations regarding many of these proposals once the legislative process begins. But it should be apparent that if even a handful of these proposals are enacted, particularly when one also considers the corporate tax provisions outlined in the American Jobs Plan, the changes would have a profound impact on the tax landscape.
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This article was written by Ed Decker, Alina Solodchikova, Christian Wood, Andy Swanson and originally appeared on 2021-04-28.
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