Tax Changes Proposed in President Biden’s American Families Plan

Last week, President Biden addressed a joint session of Congress for the first time to reveal the details of his American Families Plan. The third in a series of proposals Biden released as part of his larger economic agenda, the American Families Plan looks at significantly increasing federal spending in areas related to education, health care and childcare. As part of his plan, Biden has presented an extensive tax reform agenda that reverses many of the policies put in place by the 2017 Tax Cuts and Jobs Act. To help you better understand what President Biden has proposed, below is a brief summary of a few of the key tax changes in the American Families Plan.

  • Raising the top income tax rate to 39.6%
    • Currently, the top income tax rate is 37%. However, President Biden’s American Families Plan hopes to raise this rate to 39.6%, restoring the same highest rate that applied prior to the 2017 Tax Cuts and Jobs Act. The 39.6% marginal rate would apply to taxpayers with an annual income of over $400,000; however, the income thresholds by filing status (e.g. single, married filing jointly, etc.) are still unclear.
  • Eliminating the step-up in basis for gains of $1 million or more
    • Under current law, the cost basis of an asset transferred after a person has died is modified to its value at the date of the decedent’s death. This adjustment is what is referred to as a “step-up” in basis. President Biden’s American Families Plan would end the step up in basis at death for any inherited assets with gains of $1 million ($2 million for couples) or more. Thus, any unrealized gains of $1 million ($2 million for couples) or more on capital assets would be subject to capital gains tax upon the owner’s death.
  • Increasing the tax rate on long-term capital gains to 39.6% for those making more than $1 million
    • President Biden hopes to raise the long-term capital gains tax for those making more than $1 million per year from the current highest rate of 20% up to 39.6%. When factoring in the 3.8% net investment income surtax, the actual overall tax rate on capital gains could reach 43.4%. For reference, net investment income includes, but is not limited to, dividends, gains, annuities, taxable interest, passive rents, and royalties.
  • Extending the Child Tax Credit through 2025
    • Earlier this year, the child tax credit increased from $2,000 per child to $3,000 per child (or $3,600 for children under the age of 6). As of now, the $3,000-$3,600 child tax credit is due to revert back to $2,000 per year starting in the 2022 tax season. However, President Biden’s American Families Plan would extend that $3,000-$3,6000 child tax credit amount through 2025.
  • Abolishing the 1031 like-kind deferral for capital gains over $500,000 on real estate exchanges
    • A Section 1031 like-kind deferral allows property investors to reinvest the proceeds of real estate sales into purchases of other real estate without paying a capital gains tax on the profits. The American Families Plan would abolish the right to defer tax payments on property-investment gains of $500,000 or more by eliminating these 1031 exchanges.

As President Biden’s American Families Plan works its way through Congress, there is still much to be determined about how these potential changes will transpire and which pieces of the plan will make it into the final package. If you would like to discuss how these proposals may affect your unique financial situation, please feel free to reach out to a member of the Maddox Thomson team today. We are here as a resource to help you navigate through and plan for all the various tax-related changes to come.

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