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Speculation on Biden’s Potential Tax Law Changes

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    Tax law is seeing changes at a historic rate over the past two years. Most recently, President Joe Biden introduced the newest legislation package, the American Families Plan. The proposal consists of many concepts that have been contemplated, but also some that are novel in the American tax system.

    Biden’s latest proposal amounts to a $1.8 trillion investment of federal funds into areas such as education and childcare. It includes adjustments to tax credits on the COVID-19 relief and infrastructure package, the American Jobs Plan that was signed into law in April.

    Keeping up with the shifting landscape of tax law can be difficult. It is not unreasonable to have concerns about how recent developments might impact your own personal situation. If you have questions about how the Biden administration’s latest effort applies to you, call the Tax Law Offices of David W. Klasing at (800) 681-1295.

    Proposals in Biden’s American Families Plan 2021

    The White House released a fact sheet which provided an overall summary of what the legislation hopes to accomplish. Below are several of the items that were highlighted in the press release:

    • Restore the 39.6% top marginal tax rate
    • Impose distinct 39.6% long-term capital gain tax on “households making over $1 million”
    • Impose taxes on “step-up” in cost basis of unrealized gains at the time of death
    • Eliminate carried interest
    • Make Section 461(I) permanent, limiting business losses
    • Close S-Corp dividend employment tax loophole for those with more than $400,000 in income
    • Extend the ACA premium credit
    • Extend the Child Tax Credit, and make it fully refundable
    • Increase the Child and Dependent Care Tax Credit
    • Expand the EITC for workers without children/dependents

    The plan does not address many of Biden’s campaign proposals on tax policy, such as an expansion of Social Security tax rates or capping itemized deduction benefits. There are also no new tax credits for renewable energy incentives or first-time home buyers.

    There is obviously a lot to unpack with these proposals. Keep reading below for a more detailed assessment of the key points of the American Families Plan legislation package.

    Extending the Child Tax Credit

    The American Families Plan proposal would retain the enhancements to the child tax credit for four more years and make it refundable in perpetuity. The initial expansion to the child tax credit was passed as part of the package earlier this year. The expansions call for $3,600 in tax credits per child under 6 years old. Families with children between 6 and 17 years old would receive $3,000 in tax credits per child. Both represent an increase from the previous flat figure of $2,000. The credit is capped for households with joint filers making more than $150,000, heads of household making more than $112,500, and single parents making more than $75,000.

    Raising Capital Gains Tax Rates

    Under Biden’s proposal, households earning more than $1 million annually would be subject to the top marginal rate for long-term income, or income from investments held for over one year. That rate would rise from 37% to 39.6% under the American Families Plan proposal. The base federal tax rate on capital gains remains unchanged at 20%, as does the additional 3.8% tax on capital gains for individuals who make more than $200,000 per year and married couples who make more than $250,000 per year.

    Taxing Inherited “Step-Up” Assets at Death

    Prior to the recent proposal, assets that pass from a person who has died to their heirs receive what is called a “step-up” in their cost basis. For this reason, they are considered to have the value that they had at the time of the death. The increase in value between the beginning of the deceased’s ownership and the time of death is never taxed as the income was never realized, and the taxable income when the asset is sold by the heir will be limited to the increase in value from the time of death to the sale.

    Biden’s proposal would force the estate of the deceased to pay taxes on gains starting at $1 million, regardless of whether or not they were realized during the time of the owner’s life. The proposal also hopes to augment the “step-up” application so that it is less effective in shielding assets from tax liability.

    Planning for New Taxes on Capital Gains

    With all of the changes in the wind, protecting your upside on valuable investments is something you should consider. There are a number of different options at your disposal. One that we might suggest would be to consider selling long-term assets and reinvesting the money in similar assets. This tactic resets the clock on capital gains taxes, and it’s never a bad thing to see some new liquidity.

    Any decision on the sale of assets should consider that there will be tax liability consequences as a result. You might need to evaluate the tradeoff between lower tax rates and loss of tax deferral advantages.

    Biden’s Plans to Increase the IRS Budget for Enforcement

    With all of these new rules, the Biden administration wants a strong arm to reinforce them. The plan proposes an additional $80 billion in federal funding be directed to the IRS with the explicit purpose of cracking down on high-income evaders. The plan also includes legislation changes that would increase reporting requirements for banks and other financial institutions for accounts held by individuals. Expect the IRS to be knocking down more doors in the near future.

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