On April 28,2021, President Joe Biden announced a proposal to support Americans in childcare, family leave, education, etc. This $1.8 trillion American Families Plan includes several tax provisions that range from tax increases for some taxpayers to tax cuts for others. The plan will be funded by individual tax increases that amount to $1.5 trillion. No formal legislative actions or bills have been passed yet to enact this proposal. It is likely that some of the components of the American Families Plan will change as it progresses through Congress. However, this proposed plan for tax changes could have a large impact on individuals. Here are some of the highlights of President Biden’s American Families Plan that may affect you.
THE AMERICAN FAMILIES PLAN: PROPOSED INDIVIDUAL TAX INCREASES
Increase the Top Tax Rate for Individuals
Under the American Families Plan, the top tax rate will increase from 37 percent to 39.6 percent. This increase will apply to individuals with income over $523,600, or $628,300 for joint returns, based on current taxable income brackets.
Reform Capital Gains Taxation
The proposal will increase the capital gains tax rate for households that make over $1 million. Long-term capital gains and qualified dividend income (currently 20%) will be subject to ordinary income tax rates of up to 39.6 percent, as opposed to the current ability of paying lower, preferential tax rates on these forms of income.
Modify Estate Tax
The President’s proposal will modify the estate tax. This modification will make sure gains in excess of $1 million per person are taxed if not donated to charity. The goal is to eliminate “stepped-up” basis in inherited assets for these gains. Protections will be put in place for family-owned businesses and farms, but the details have not yet been provided.
Eliminate Carried Interest
The proposed plan will eliminate carried interest so that hedge fund partners must pay ordinary income rates on their income. The details of how this will be accomplished have not yet been provided.
Limit Like-Kind Real Estate Exchanges
The proposal plans to eliminate the ability to use like-kind exchange transactions to defer real estate gains over $500,000.
Permanently Limit Use of Business Losses
Scheduled for sunset after 2025, the disallowance of “excess business losses” will be made permanent per provisions of the American Families Plan.
Eliminate Inconsistencies with the Additional Medicare Tax
The proposal plans to eliminate inconsistencies with the application of the net investment income tax. This is a 3.8 percent tax placed on certain investment income. Households making over $400,000 are the target of these inconsistencies. However, which inconsistencies are specifically being targeted has not yet been discussed.
THE AMERICAN FAMILIES PLAN: PROPOSED INDIVIDUAL TAX CUTS
Extend the Expanded ACA Premiums Tax Credit
On March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was signed into law. ARPA included a provision for two years of lower health insurance premiums using an expanded premium tax credit for individuals who buy their own coverage. The proposed American Families Plan will make these tax credits permanent.
Extend the Expanded Child Tax Credit
Earlier this year, ARPA increased the child tax credit from $2,000 to $3,000 per child for children aged six and up, and $3,600 per child for children under six years old. ARPA also made 17-year-olds eligible for this credit and provided for it to be fully refundable. ARPA also made it so the increased child tax credit will be delivered to families year-round as a prepayment of the credit. The proposed American Families Plan will make permanent the full refundability of the child tax credit. It will also extend the other expansions to the credit through the year 2025.
Permanent Increase for the Expansion of the Child and Dependent Care Tax Credit
ARPA expanded the child and dependent care tax credit so that families could receive a tax credit for up to half of their spending on childcare for children under 13 years old. It provided for a maximum of $4,000 per child or $8,000 for two or more children. The tax credit was phased out for families who make $125,000 or more up to $400,000. ARPA applied only to the year 2020, but the American Families Plan will make this expansion permanent.
Permanent Increase for the Expansion of the Earned Income Tax Credit for Childless Workers
When it was passed, ARPA tripled the earned income tax credit for childless workers for the year 2020. The American Families Plan will make this expanded tax credit permanent.
What Does This Mean for Individual Taxpayers?
Because the American Families Plan is still making its way through Congress, nothing is set in stone yet. Not everything proposed will become law, and many details are still unknown. So, as a taxpayer you should continue monitoring new developments, especially those related to the timing of capital gain transactions and current estate plans. Take caution and check with a tax professional before you react to the proposed individual tax changes.
Trust Lawhorn CPA Group to Keep You Up to Date
We at Lawhorn CPA Group understand how stressful it can be to try to understand new tax changes. That’s why we will continue to keep an eye on the American Families Plan so we can provide you with updates as we learn about them. We want you help you stay as educated as possible about how your individual taxes may be affected.
When you choose Lawhorn CPA Group for your individual tax preparation, you will be backed by CPAs and accountants with years of experience to make sure your taxes are filed accurately and in accordance with the latest laws and tax updates. We will work with you to provide a personalized solution to help you achieve your tax and financial goals. Whether you need help with income tax returns, developing a tax strategy, or dealing with tax compliance issues, our knowledgeable accounting experts will get you set on the right path and provide you with all the up-to-date information you need. Reach out to Lawhorn CPA Group today to benefit from personalized accounting and tax services. Give us a call at 865-212-4867 or contact us online to get started.