Proposed Tax Law Changes – American Families Plan

On April 28, 2021, President Biden unveiled his $1.8 trillion American Families Plan, a ten-year plan of increased federal government support of education, child care, paid leave, nutrition and families.  The American Families Plan would be substantially funded by tax increases, primarily from wealthy taxpayers, and by improved tax compliance and enforcement.

While most details of the Plan have not yet to been provided, the tax plan includes the following anticipated legislative changes: 

• The highest marginal federal individual income tax rate would be increased to 39.6% from 37%.
• Capital gains and dividends would be taxed at ordinary income tax rates (i.e., like compensation income) for households making over $1 million. The 3.8% investment income (Medicare) tax would be added, resulting in a 43.4% federal income tax on such income.  (That income would continue to be subject to state and local income tax, which could make the effective tax liability on such income even higher.)
• “Step-up on Basis” for transfers to beneficiaries  – which allows estates to revalue assets to their fair market value at the time of a decedent’s date of death for purposes of later sales – would be eliminated for gains in excess of $1 million (up to $2.5 million per couple when combined with existing real estate exemptions.)
  • This change would not apply to donations to charitable organizations. 
  • This change would be “designed with protections” so that family-owned businesses and farms would not have to pay taxes when such property is given to heirs who continue to run the business.
• The deferral of tax on “like-kind” exchanges of real estate – for gains greater than $500,000 – would be eliminated.
• The limitation on the deduction of large “excess business losses” would be made permanent.
• The application of the 3.8% investment income (Medicare) tax would be changed to ensure that it is applied consistently to those making over $400,000 per year. 
• Substantial additional funding would be provided to the IRS, leading to better compliance and reporting. 

No effective dates for these provisions have yet been proposed. 

Not included in the plan are any changes to the $10,000 limitation on state and local tax deductions or an increase in the federal estate tax rate (top bracket currently 40%) or a lowering of the estate tax exemption amount ($11.7 million in 2021).

As these potential tax law changes are discussed and debated in the weeks and months ahead, considerable changes are likely to be made by Congress before a final Bill is signed into law by President Biden. 

The Levin Law Firm will keep you informed as new developments continue to occur with respect to the Biden tax proposals.