Notable Tax Provisions of President Biden’s Proposed American Families Plan

On April 28, 2021, President Biden addressed a Joint Session of Congress unveiling his proposals to invest in and restructure the American economy. In his address to Congress, President Biden formally announced his American Families Plan (the “AFP”) which combines $1 trillion in spending with $800 billion in tax cuts and credits for low and middle-class families, and targets high-income earners and corporations to fund all of the costs over a 15-year period. The White House released a Facts Sheet outlining the AFP’s key proposals which can be found here.

The AFP, in its current form, includes the following notable provisions:

• Increasing the top individual tax rate from 37% to 39.6%, and reintroducing the Pease limitation, which imposed a cap on the amount of allowable itemized deductions.
• Increasing the capital gains tax rate from 20% to 39.6% for households earning more than $1 million annually. A White House official commented that the $1 million threshold would be the same for both single and married filing jointly filers. Given the net investment income tax rate of 3.8%, the top federal tax rate on capital gains could be as high as 43.4% for many taxpayers, along with applicable state and local tax.
• Repealing the “step-up in basis” for gains on inherited assets in excess of $1 million for individual filers or $2.5 million for married filing jointly filers, although there is expected to be an exception to this proposal for certain family-owned businesses and working farms.
• Eliminating the preferential tax treatment of carried interest. The AFP would permanently end the preferential tax treatment that certain investors receive on specific types of income, although the White House Fact Sheet acknowledges that eliminating the carried interest benefit is less relevant when viewed in the context of the proposal to tax capital gains at a 39.6% rate, as noted above.
• Imposing the 12.4% social security payroll tax, split between employer and employee, for income earners more than $400,000. Currently, social security payroll tax is only imposed on wages up to $142,800 in 2021.
• Ending the deferred tax treatment for like-kind exchanges related to property-investment gains of more than $500,000. From a practical perspective, this proposal essentially eliminates the deferred tax treatment for like-kind exchanges for everyone except smaller-scale investors.
• Extending the Child Tax Credit until 2025 and making the credit permanently refundable to aid low-income families. The COVID-19 relief package temporarily expanded this tax credit from $2,000 to $3,000 per child and $3,600 for those under age six. President Biden extended this provision until 2025 but did not make it permanent.
• Creating a paid family and medical leave program that would guarantee 12 weeks of paid parental, family, and sick leave, and make permanent the expansion of the earned income tax credit to childless adults with low income.

To help fund the AFP and enforce its proposals, President Biden also announced his intention to significantly increase the audit power of the Internal Revenue Service. The Biden Administration intends to increase the IRS’s budget by $80 billion (parceled out over 10 years) to enhance enforcement efforts.

Please note that the AFP does not include the following proposals that had been widely expected by policymakers and tax commenters: increasing the corporate tax rate from 21% to 28%, and reducing the estate tax exemption from $11.7 million to $3.5 million per person The absence of these possible changes from the AFP should not be viewed with a sigh of relief by those taxpayers who would otherwise be adversely impacted by these changes. It is widely believed that these changes, among others, will be included when the required tax legislation is introduced in Congress over the next few months.

If you have any questions, please contact Michael Cumming (MCumming@dykema.com or 248-203-0740), Scott Kocienski (SKocienski@dykema.com or 248-203-0868), Richard Lieberman (RLieberman@dykema.com or 312-627-2250), Asel Lindsey (ALindsey@dykema.com or 210-554-5298), Victoria Remus (VRemus@dykema.com or 248-203-0553), Nardeen Dalli (NDalli@dykema.com or 248-203-0793), or your local Dykema relationship attorney.