The American Families Plan: A Tax Summary

Preface: The American Families Plan is an investment in the nations children and families—helping families cover the basic expenses that so many struggle with now.

The American Families Plan: A Tax Summary

Credit: Donald J. Sauder, CPA | CVA

Given the increasing likelihood of new tax rules and tax reform in coming months from the Biden Administrations’ proposed American Families Plan, this blog is written to provide a general outline of the tax implications.

First, the good news is that there will be no change in income tax expenses for those of us earning less than $400,000. No income tax cost changes whatsoever? Yes – right. Well, that should help reduce concerns initially, and yes, it does get better.

Let’s consider some hypothetical income tax scenarios. Married filing taxpayers jointly earning say a combined $500,000 according to initial Biden Tax Plan Calculators, the cost of income taxes would only increase $3,900. The same scenario at $600,000 and the federal taxes would only increase only $8,500, at a $700,000 AGI and the increase would be $12,000 and at a cool $1.0M of AGI the tax increase would only be $19,800. For those earning $5.0M, the tax increase would be approximately $123,000, and for those making $12.0M, the approximate income tax increase would be roughly $305,000 or a blended rate increase rise of 2.54%. These certainly are not crystal bowl-shattering income tax rate increases indeed.

President Biden proposed tax legislation is to lift millions of children out of poverty with a plan to make it easier to afford child care and expansion of the Child Tax Credit, among other tax revisions.

The Child Tax Credit currently at $2,000 per child would increase to $3,000 for children six years of age and above and $3,600 per child under six years of age. The credit would also be fully refundable, so a family that needs the credit most will benefit. The credit would also be available in regular payments to pay for household expenses as they arise, so the benefits would not require an annual family tax filing. The expanded child tax credit would begin to phase out for those couples earning above $150,000, but couples earning up to $400,000 could still qualify for $2,000 per child.

Also, for those taxpayers filing without children, The American Families Plan includes tax provisions so they will receive an increased earned income tax credit benefits or well-deserved reward for those who work hard every day at modest wages to support their communities.

For capital gains tax provisions, taxpayers will need to earn more than $1.0M to pay more taxes. A recent study shows that the top income earners failed to report on aggregate more than 20% of their earnings and a failure to pay more than $175.0B in income taxes. The American Families Plan would tax all income above $1.0M at the same tax rate of 39.6%, including capital gains on stocks, real estate, or other investment assets.

The above capital gains tax rates provision is one significant tax planning implication relevant to less than 1 of every 100 taxpayers. Secondly, the tax reforms includes ending the practice of “stepping-up” basis for assets passing to heirs in estates for those unrealized gains above $1.0M (or $2.5M per couple [$1.0m per person + $250k exclusion on gains from primary residence]) unless the assets with built-in gains are donated to a qualifying charity.

Although this proposed Biden Administration tax plan is rather pleasantly conventional for the majority of taxpayers, it includes large increases to the IRS operating budget to enforce tax compliance for that those earning above $400,000 and ensure payment of an accurate amount of tax. Recent studies have shown that the top 1% of tax payers failed to pay $197.0 billion annually of taxes in aggregate and failed to report 20% of their annual income. These additional resources for the IRS would focus on large corporations, businesses, estates, and high income earners to raise a planned $700.0B within a decade.

The tax reform bill includes critical exemption relief for family-owned businesses and family-farms that protect family-run business assets transferred to qualifying heirs to nimbly escape this expensive loophole closure tax lasso of taxation directly on estate asset transfers. This tax provision is another real affirmation that President Biden’s American Families Plan is true its name.

Additionally, The American Families Plan is designed to end the IRC 1031 like-kind-exchange tax deferrals on real estate transactions, but only for gains greater than $500,000. Finally, the tax legislation reforms would also require consistent rules for the 3.8% Medicare tax.

President Biden has stayed true to his promise that Americans earning less than $400,000 will not see higher taxes. For those making above that, Smiles, it’s the cost of another toll on the highway of financial successes.

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