How may Joe Biden's tax proposals have an effect on you?

On April 28, 2021, President Joe Biden presented his proposed American Families Plan in an address to the nation. The address contained the hoped-for "once in a generation" investments that focused on the benefits for American families. These investments included expanding government-funded education, increasing various credits for children and earned income, proposals for paid vacation, and reforming unemployment insurance programs. The cost of such investments, as well as various investments in traditional infrastructure programs, are expected to be borne at least in part by various tax changes.

This article focuses on the tax mechanisms that President Biden outlined to fund the American family plan. In reviewing this summary, it should be noted that none of the amendments listed below have been presented to Congress as a comprehensive legislative package. These are just conceptual proposals awaiting specific legislation to be drawn up by the leaders of Congress. Among the proposals are:

1. Increase in the corporate tax rate from currently 21% to 28%. It is important to note that it was only on May 5th that President Biden revealed his willingness to compromise at a rate of 25%.

2. Repeal of various tax changes that were included in the context of the Tax Reduction and Employment Act 2017. This includes returning the highest individual income tax bracket at 39.6% for individuals with incomes greater than $ 400,000. The proposal is unclear whether this threshold applies to both joint applicants and individuals. Most practitioners believe that the 39.6% rate, if passed, would apply to individual applicants with incomes less than $ 400,000.

3. Increase the tax rate on capital gains and dividends to 39.6% for households earning more than $ 1 million. Combined with President Obama's statutory net investment tax of 3.8% on capital gains, this would raise the federally imposed maximum tax rate on capital gains to 43.4%.

4. Eliminate the ability of hedge funds and private equity partners to pay taxes on their transferred shares at the capital gains rate. While noteworthy, this provision has less of an impact when combined with the increase in capital gains rates applicable to those who earn more than $ 1 million.

5. Eliminating the ability to defer capital gains on property sales on so-called "similar" exchanges for gains in excess of $ 500,000. This would have a profound impact on both depreciable property owners and others.

6. Eliminate the so-called "base stocking" on property inherited at death. It's important to note that the president's proposal would only apply to profits greater than $ 1 million. Mention is made of the inclusion of protective measures for family businesses and farms that continue to be run by heirs. However, details of this exemption were not given. As important as removing the base increase is the president's statement that the proposal "will ensure that profits are taxed when property is not donated to charity". Although not stated, the conclusion is that gains in excess of the amounts excluded would be taxable on death, regardless of whether or not the property is later sold by the deceased's heirs. This is in line with a proposal by Senators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse and Elizabeth Warren known as the STEP (Sensible Taxation and Equity Promotion) Act.

For specific information on the President's proposal, please visit: Fact Sheet: The American Family Plan | The White House. If you visit this overview page, you will find that changes to the level of inheritance tax are not mentioned. Currently, federal estate tax only applies to estates owned by individuals who give more than $ 11.7 million to their heirs. This amount will automatically be halved from January 1, 2026 in accordance with the forfeiture provisions of the Tax Reduction and Employment Act 2017. However, there is much speculation about previous changes that would reduce the amount to $ 5M or even $ 3.5M before the expiration date. It is theoretically possible that this would not be the case if the proposed elimination of the increase in the base and the taxation of the accumulated profit on death occur.

Our October 2020 article introduced high net worth individuals and business owners and other perspectives on three of the proposed more impactful changes. Family Business Succession Planning in Era of Tax Uncertainty – Take advantage of the tax breaks available or you may lose them. More information can be obtained from the drafting of legislation.