American Families Plan Overview

While addressing a joint session of Congress on April 28, 2021, President Biden brought forth the American Families Plan. The plan follows the administration’s aim of providing tax breaks to low- and middle-class families, while increasing payments for those in the top tier tax brackets.

Areas of Impact

Specific focal points of the American Families Plan are education and childcare. The $1.8 trillion plan would provide funds for universal preschool, two years of free community college, paid family and medical leave, and improvement of teacher preparation and training to address teacher shortages. affordable childcare, extension of child tax and dependent care credits, and revamped school-issued nutrition were also highlighted in the proposal. The plan comprises of $1 trillion in total investments and $800 billion in tax cuts.

Proposed Tax Shift

In addition to the above, the plan laid out potential changes for wealthier individuals. For a household with income of over $400,000, the top marginal tax rate would increase to 39.6%, along with consistent application of a 3.8% net investment income tax. For families earning over $1 million, long-term capital gains would be taxed at 39.6%. The step-up in basis for gains more than $1 million would be reduced at death and the gains taxed if the property is not donated to charity. Also put forward is the elimination of carried interest (to be taxed at ordinary income rates) and permanently extending excess business loss limitation rules. A majority of these tax changes will take effect once passed. However, a statement from the President on May 28 contradicted the proposal and may lead to the capital gains tax taking place retroactively in April.

Along with adjustment in law, President Biden indicated increasing Internal Revenue Service audit efforts. $80 billion would be set aside to focus on individuals who have sought out tax avoidance strategies. The funding and increase oversight for the IRS are in response to those who aggressively take part in tax evasion.

Tax Reform Outlook

Though not part of the American Families Plan, the Biden Administration has shown purpose in acting on the following measures:

• Phasing out the 20% qualified business income tax deduction;
• Limiting the benefit of itemized deductions to 28% of their value and restoring the “Pease limitation” cap on itemized deductions;
• Reducing the lifetime estate tax exemption from $11.7 million to $3.5 million (i.e., back to 2009 levels) and increasing the estate and gift tax rate from 40% to 45%; and
• Imposing the 12.4% social security payroll tax on earned income above $400,000

Introduced, but not enacted, the American Families Plan faces a lack of bipartisan support, further complicating individual tax projections. Regardless of what takes place in Washington, homes earning over $400,000 can expect an increase in tax for 2021. Starkly omitted from the plan was discussion surrounding lowering the estate tax exemption or raising the estate tax to 45%, despite being a point noted during the President’s campaign. In anticipation of this change, revisiting your family’s estate to implement beneficial strategies is encouraged.

Tax planning for 2021 remains difficult as information surrounding the proposal is not concrete. A fixed date of rule is unknown; however, the provided information allows for individual, business, and estate projection assistance. If you or your family seek such services or additional clarification on the coming changes, please do not hesitate to contact us.

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