The American Families Plan is part three of the Biden government's Build Back Better program, which deals with "human infrastructure" and contains proposals for free education, direct support for children and families, and increased reductions in income taxes for families with children and American workers. On April 28, 2021, the President introduced it in his address to a joint session of Congress.
The infrastructure parts of the Build Back Better plan are approximately $4.1 billion - $2.3 billion under the US jobs plan and $1.8 billion under the America families plan - and are amongst the most ambitious government programs in decades.
Income tax increase on wealthy Americans
The Biden administration proposes to raise the income tax of the rich and provide the IRS with more resources to improve compliance. The general increases relate to the collection of capital gains tax and eligible dividends at maximum rates of ordinary income tax and eliminating the "step-up" in basis rule.
Additional reports from financial institutions: The administration will demand better reporting from financial institutions, which would require reporting on account balances and flows.
Apply the 3.8% Medicare tax to taxpayers who earn more than $400,000: Under current law, Medicare tax is a 3.8% tax that only applies to a portion of a taxpayer's income. Tax is paid on the lesser of the taxpayer's net investment income or the excess of his adjusted gross income over the adjusted gross income limit ($200,000 for individuals and $250,000 for married taxpayers). Under the proposal, Medicare's 3.8% tax limit would be limited to taxpayers earning more than $400,000.
Eliminate "like-kind" transactions for gains over $500,000: A "like-kind" exchange transaction is the exchange of real estate or investment property with another, which allows the deferral of capital gains tax. The proposal would eliminate the deferral of revenues over $500,000.
Eliminate the carried interest rule: Income linked with "carried interest" would be taxable at the usual rate of income tax, rather than the preferential rate of return on capital under current legislation (20%). A "carried interest" is a contractual right that gives a fund manager a share of a company's profits and, per applicable law, is taxed at the prime rate of return on capital, provided that it is satisfied.
Increase the IRS execution budget: The government will need about $80 billion over ten years to reform the tax administration and provide the IRS with the resources and information it needs to investigate large corporations, associations, and high net worth individuals. According to the government, American families with annual incomes of less than $400,000 will not be targeted.
Increase the maximum income tax rate: The rate will drop to 39.6% (from 37%) for taxpayers within the top 1%. Note that the rate of 39.6% was the maximum rate in effect before the TCJA (Tax Cuts and Jobs Act, 2017).
Permanently extend the current limitation, which limits significant excess business losses: This provision limits the current deductibility of "excessive business losses." Under current law, taxpayers who are not corporations (including "pass-through" entities such as corporations, S corporations, LLCs (limited liability companies)) are subject to a limitation of "Excessive business loss." An excessive business loss is an amount by which the total deductions attributable to all transactions or activities of a taxpayer exceeds the total gross income and profit attributable to those transactions or activities plus $250,000 (or $500,000 in the case of a joint tax return). . The CARES Act (Coronavirus Aid, Relief and Economic Security Act) removed the limitation on excessive business losses for 2018, 2019 and 2020. However, as of 2020, the limitation has returned and is now in effect.
Regulates Income tax preparers: The administration will demand the legal authority of the IRS to regulate tax preparers and impose tougher penalties on unscrupulous tax preparers.
Remove Step-Up in basis: In general, under current legislation, the income tax basis for property acquired or transferred by a deceased person is their fair market value at the time of the deceased's death, not the initial cost to the deceased. The advantage of this rule is that the financial gain from the property assessed before death will not be subjected to federal tax on the income available to the heir. According to the proposal, the pre-death contribution would be imposed retrospectively by the heir. Significantly, legislation will be drafted with protections that would exclude family businesses and farms if the deceased's heirs continue to run the business.
Subject long-term earnings and eligible dividends to ordinary income tax rates: The rate applicable to long-term capital gains and eligible dividends would increase to 39.6% for households earning more than $1 million. Long-term capital gain derives from assets held for more than one year. An "eligible dividend" is an ordinary dividend that meets specific criteria to be taxed at the lower legislated rate of return on capital rather than the higher personal income tax rate.
What was not included
The Biden administration did not include any changes to the property tax and donations opposed during the campaign. These proposals included a reduction in the unified taxpayer exemption from inheritance and gift taxes from the current value of $11.7 million (adjusted for inflation) to just $3.5 million, as well as an increase in the tax rate of 45%. While these changes to the inheritance and gift tax system are not included in the American family's plan, the proposed elimination of the staggering income tax basis would significantly impact family tax and estate planning. In addition, the absence of proposed changes to the current inheritance and gift tax system does not imply that such changes will not be proposed later. Many Democratic leaders still show great interest in extending property taxes and donations to target inherited wealth.
Way forward
There are two ways to get tax legislation passed through Congress. First, through a "regular order," which requires bipartisanship; that is, a majority of votes in the House and 60-votes in the Senate (to avoid obstructions). Secondly, through the budget reconciliation process, which only requires the approval of a simple majority in the House and Senate (and bypasses filibuster in the Senate).
In a later ruling in April this year, the Senate MP warned that Senate budget rules would allow the budget reconciliation process to be used multiple times in a fiscal year. April 4 creates additional opportunities for Democrats to 'Pass a Republican Party bill before 2022.
There are many approvals for the American Family Plan, some of which relate to the American Employment Plan and some not. The possibilities include:
A bipartisan deal with the Republicans on the American jobs plans or a smaller plan, as proposed by the Republican Party.
Otherwise, the legislative route for the American family plan would go through the budget reconciliation process; if so, would there be one or more invoices?
As to the date of entry into force of any individual tax laws passed under the American Family Act, it is also uncertain at this time. Although the outlook seems bright, the legislation could come into force on the date of its introduction, adoption, or in 2022, depending on the circumstances. It is important to monitor this issue closely as the legislation progresses in Congress.
Bottom Line
Then-candidate Joe Biden presaged the tax increase proposals used to pay for the US family plan during the presidential campaign. Among the changes to income tax, nearly doubling the capital gains rate for the rich will be one of the most controversial proposals, essentially equating the taxation of income from wealth to that of labor. Additionally, for "Medicare taxpayers," the 3.8% increase brings the federal tax rate to 43.8%, up from 23.8% under current legislation.
The possible elimination of the step-up basis at the time of death is an expensive issue. Not only would the valuation of assets before death become taxable in the hands of the heirs of a deceased taxpayer, but, depending on the circumstances, the tax rate could be significantly increased if the maximum rate of capital gains increased to 39.6%.
Increased focus and funding for compliance aim to make the rich pay what they owe and should be a major income generator.
Finally, though not covered here, the $800 billion changes to improve tax credits are expected to impact working-class families significantly.
Summary
In a joint session of Congress on April 28, 2021, US President Joe Biden unveiled the Plan for American Families, which focuses on "human infrastructure" and represents one-third of his Build Back Better initiative.
The $1.8 trillion family plan includes $1 trillion in spending and $800 trillion in tax and credit cuts for low and middle-income families.
Higher-income taxes partially offset US family plan spending for wealthy Americans, a larger IRS budget for compliance, and, in particular, does not include property tax changes. And the donations offered during the campaign (apart from the elimination of step-up in basis).
The legislative route for enactment and the actual dates have not yet been established.
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