May 25, 2021

Tax Provisions in the American Families Plan

At the end of April, the Biden Administration introduced the American Families Plan (AFP), comprehensive legislation that calls for an investment of $1.8T through grants and tax credits for family and educational programs.  As part of President Biden’s larger economic recovery package, it proposes universal preschool, two years of free community college, paid medical leave, an extension of the Child Tax Credit, Earned Income Credit, and the Child and Dependent Care Credit.  In other words, the AFP is designed to focus on education, family support, and workforce support to enable the economy to be rebuilt from the bottom up. Funding for the plan will be generated through a series of tax increases, changes, and reforms targeting the top-earning individuals and families. Although the AFP is likely to change as it progresses through Congress, it does provide important insights into which reforms made be forthcoming. To help clients, prospects, and others, Wilson Lewis has provided a summary of the proposed tax changes below.

Proposed Tax Increases

• Increase in the Top Tax Bracket – There would be an increase in the top federal income tax bracket from 37% to 39.6% for taxpayers earning over $400,000. This modification would undo the top rate reduction made in the American Tax Cuts and Jobs Act of 2017 (TCJA).
• Raise Capital Gains Taxes – There would also be an increase in the capital gains tax rate for taxpayers with gain in excess of $1M. Under the AFP, the tax rate would be raised to 39.6% on investments, which represents an almost 100% increase in the capital gains tax rate.
• Eliminate the Carried Interest Loophole – The AFP also calls for Congress to close the carried interest loophole, so hedge fund partners pay ordinary income tax rates on income.
• Estate Tax Changes – A step-up basis allows an individual that inherits an asset to recognize the higher market value at the time of inheritance rather than when it was originally acquired. This change serves to reduce the overall capital gains tax on inheritances. The AFP would eliminate this and required inherited asset gains in excess of $1M to be subject to capital gains tax, if not donated to charity. It is important to note that family-owned businesses and farms will be excluded from this provision.
• 1031 Exchange Limitations – Under existing regulations, real estate investors can defer the gain on the sale of real property through a 1031 like-kind exchange. The AFP would limit the amount of the gain which could be deferred using this method to $500,000. Any amount above this limit would be subject to capital gains tax.
• Eliminate Medicare Tax Loopholes – While high-income earners and investors generally pay 3.8% Medicare tax on earnings, the application is inconsistent because of loopholes. The proposed changes would eliminate these loopholes and ensure those earning $400,000 would be taxed consistently.
• Additional IRS Enforcement – While not a tax change, the AFP does call for the allocation of additional resources for the IRS, including enforcement efforts focused on the highest income earners.

Contact Us

It is clear from the details presented in the American Families Plan that many tax reform changes made in the TCJA will be reversed. While the AFP has not yet passed Congress, it does provide important details about how taxes may be changing in the coming months. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.