On April 28, 2021, President Biden released his American Families Plan. This plan includes some, but not all, of the proposals Biden made during the presidential campaign. While the plan expands child tax credits and the earned income tax credit, it calls for tax increases on high-income individuals.
It is important to note that this is just a proposal and the final version of any tax law changes will most likely include revisions and other provisions. While there have been some suggestions that any ultimate tax law changes could be retroactive, history would indicate that a retroactive change is unlikely.
Key provisions that may impact high-income individuals include-
- Enforcement Efforts – Increased investment in IRS enforcement against those with incomes over $400,000. Additional reporting requirements on financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting similar to reporting on wages.
- Increase Top Tax Rate on Individuals to 39.6%- returning the top rate on individuals from 37% to the pre-2017 tax cut rate of 39.6%.
- Elimination of Preferential Capital Gains Tax Rates – for individuals with income over $1 million there would be no preferential rate for long-term capital gains and qualified dividends. All investment income for these individuals would be taxed at the same rate as ordinary income.
- Net Investment Income Tax – expanding the 3.8% net investment income tax. Although details are not specifically provided, it is thought the expansion would apply this tax to all income that is not already subject to Medicare taxes.
- Repeal Basis Step-Up for Inherited Assets – the proposal calls for repealing step-up for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions). There is no clear guidance in the proposal on how this threshold would be applied.
- Like-Kind Exchanges – repeal tax deferment for like-kind exchanges under Section 1031 for gains greater than $500,000.
- Carried Interest – the proposal would close the carried interest loophole which allows preferential long-term capital gains tax rate taxation of profits that general partners of private equity and hedge funds receive as compensation. Presumably taxing these profits at ordinary income rates.
Other provisions not included in the plan but either discussed during the campaign or popular among Democrats are capping itemized deductions at 28%, imposing Social Security taxes on income over $400,000, changes to the Qualified Business Income deduction (Section 199A) and relief from the $10,000 cap on the state and local tax deduction.
There are not many details on the practical application of the proposed provisions and there are many questions that will need to be answered as the proposal makes its way through the legislative process. Awareness of the proposals that are on the table will allow you and your advisors to be prepared to act when the tax law is ultimately enacted. Please reach out to your wealth advisor if you have questions about how this can impact your financial goals and planning. Connect with us today!