Income Tax Proposals in the American Families Plan

On April 28, 2021, President Biden announced his proposed American Families Plan. This proposal follows the already-passed American Rescue Plan, an economic stimulus bill, and the infrastructure-focused American Jobs Plan.

A White House fact sheet provides an outline of the provisions under the American Families Plan, in general terms. As legislation develops, we will get a better understanding of how these rules will operate.

Following is a broad overview of these proposals and some observations relating to them.

ECONOMIC AND EDUCATIONAL PROVISIONS

The American Families Plan includes a number of provisions addressing certain economic and educational needs, such as:

• Universal preschool for three and four year-olds.
• Two tuition-free years of community college.
• Free tuition for certain universities specializing in serving underrepresented students.
• Investment in teaching and child care education.
• Free or lower-cost child care for lower income families.
• Expanded paid leave programs.
• Improved student lunch programs.
• Automatic adjustments to unemployment insurance.

The proposed plan also contains a number of tax benefits such as:

• Extending enhanced premium tax credits and making premium reductions permanent.
• Extending the enhanced child tax credit through 2025.
• Permanently extending the enhancements of the child and dependent care tax credit.
• Permanently extending the increased earned income tax credit for taxpayers without children.

The plan will be funded by an increase in tax revenue over a 10-year period. Much of this likely will come from individual tax increases such as:

• Raising the top individual income tax rate to 39.6%.
• Raising the capital gains rate to 39.6% for households with income over $1,000,000.
• Expanding the 3.8% net investment income tax.
• Repealing the basis step-up for certain inherited assets for gains in excess of $1,000,000 ($2.5 million for couples).
• Making the limitation of Excess Business Losses for individuals permanent.

Marcum Observations

While we await more details regarding each provision and its potential passage to law, following are several observations to keep in to mind.

• The American Families Plan proposes to increase the top individual tax rate from 37% to 39.6% for taxpayers whose income is $400,000 or more. We do not know how the $400,000 will be defined (e.g., Gross Income, Adjusted Gross Income, Taxable Income, or some other income measure) or whether there will be different thresholds for different filing statuses.

The plan would raise the top capital gains rate from 20% to 39.6% for households with more than $1 million in income. We do not know how the $1 million will be defined, how households will be defined, or the proposed effective date. The proposed capital gain rate increase will reduce some of the benefit of carried interest.

• While the plan includes an expansion of the 3.8% Medicare tax, it lacks details on what income will be covered.
• The plan would repeal the “step-up” in basis for certain inherited assets for gains, as noted above, but includes special protections for family-owned businesses and farms and heirs who continue to run the business.

In Addition

Additional aspects of the American Families Plan that are worth noting:

• Increased funding for the IRS to improve enforcement.
• Carried interest would be taxed as ordinary income.
• Repeal of like-kind exchange tax deferrals.

The President has stated his willingness to negotiate the details of his proposals, and it seems this is only the beginning of what is sure to be a long legislative process. Marcum will be watching every step of the process and will keep you updated with future tax notices.

To learn how the American Families Plan may affect you, or should you have any questions about details of the plan, please reach out to your Marcum tax professional.