Government officials enacting new bill

American Families Plan includes several individual tax changes

On April 28, 2021, President Biden addressed a joint session of Congress, announcing the details of his administration’s latest legislative proposal, the American Families Plan (AFP). The AFP calls for approximately $1 trillion in spending and $800 billion in tax cuts geared toward providing universal preschool and two years of free community college, affordable child care, enhanced paid family and medical leave, unemployment insurance reform, and other priorities.

The AFP is the third component of the president’s “Build Back Better” agenda, including the American Rescue Plan (enacted in early March) and the American Jobs Plan (a $2 trillion infrastructure package unveiled in late March). While the infrastructure bill would be funded by corporate tax increases, the AFP would be paid for by tax increases on higher-income individuals.

Prospects for passage

Use of the budget reconciliation process is generally limited to one spending bill per federal fiscal year and was used already in the current fiscal year to pass the American Rescue Plan Act. However, earlier this month, the official advisor to the Senate on the chamber’s rules and procedures determined another bill could be passed using the filibuster-proof method by revising the 2021 fiscal year budget resolution. At this point, it is uncertain whether reconciliation would be used again on the AFP or the infrastructure package.

It should be noted that even achieving the 50 votes needed for passage via reconciliation in the Senate (with Vice President Harris casting the tie-breaking vote) may be difficult on account of apparent differences within the Democratic party over how much spending is necessary on the AFP’s provisions. As a result, we expect lengthy debate over the legislation, along with the introduction of several counterproposals before any legislation is put forth for a vote.

Key proposals

The following are some of the critical tax proposals in the plan:

  • Increase the top individual rate to 39.6% from the current 37%. This rate was at 39.6% prior to passage of the Tax Cuts and Jobs Act (TCJA) in 2017.
  • Eliminate eligibility for the favorable 20% rate on capital gains and dividend income for households making more than $1 million per year. Rather, this income would also be subject to the top individual tax rate of 39.6%.
  • Disallow estates to step-up the tax basis of its assets to fair market value as of the date of an individual’s death. This change would generally apply to gains in excess of $1 million for an individual and $2.5 million per couple, and would tax appreciation if property is not donated to charity. Protections would be put in place to exempt family-owned businesses and farms from taxes when passed down to heirs who continue to run the business.
  • End like-kind exchange tax deferrals for real estate gains in excess of $500,000.
  • Tax carried interests as ordinary income, rather than long-term capital gains. This provision does not appear to be tied to the carried interest-holder’s income.
  • Extend permanently the current limitation in place that restricts the deductibility of “excess business losses” for noncorporate taxpayers. This limitation expires in 2025 under current law and has been temporarily suspended as part of previous COVID-19 relief provisions.
  • High-income earners generally pay a 3.8% Medicare tax on their earnings. The proposal is not specific, but it may be targeting the income associated with limited liability companies and limited partner interests as well as income from S corporations, which can avoid the additional tax under current law. However, legislation impacting Social Security and Medicare may not be eligible for budget reconciliation, so a bill including this payroll tax expansion would require 60 votes to pass in the Senate.
  • Make permanent the expanded Affordable Care Act premium tax credits in the American Rescue Plan.
  • Extend the child tax credit increases in the American Rescue Plan through 2025 and make it fully refundable on a permanent basis. The American Rescue Plan expands the child tax credit to $3,000 per child from $2,000 per child who is 6 and older, and $3,600 per child under the age of 6. It also makes 17-year-olds eligible for the first time and makes the credit fully refundable.
  • Make permanent the temporary Child and Dependent Care Credit expansion enacted in the American Rescue Plan. Families will receive a tax credit for as much as half of their spending on qualified child care for children under age 13, up to a total of $4,000 for one child or $8,000 for two or more children. A 50% reimbursement will be available to families making less than $125,000 a year, while families making between $125,000 and $400,000 will receive a partial credit with benefits at least as generous as those they receive today. The credit can be used for expenses ranging from full-time care to after-school care and summer care.
  • Make permanent the Earned Income Tax Credit expansion for childless workers.
  • Increase funding for the IRS to focus on enforcement for large corporations, businesses, estates and higher-income individuals. Also give IRS the authority to regulate paid tax preparers.

We encourage you to reach out to your Baker Tilly advisor regarding how this may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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