The American Families Plan that President Biden unveiled on April 28, 2021, could bring significant changes to the federal tax code and have an extensive impact on both income tax and estate tax if passed into law. Questions on timing and to what extent these changes would occur remain in question.
Economic and Political Forces at Play
So far, the increased taxes have not been introduced in Congress, but there is a political appetite to raise taxes due to a variety of culminating factors. Now that Democrats have a majority representation in the White House and Congress, along with additional rounds of stimulus bills and the increased debt, the federal government has amassed more political clout to increase taxes to effectively pay the bill.
Specifically, President Biden is seeking to “end capital income tax breaks and other loopholes for the very top,” according to the White House Fact Sheet on the American Families Plan. This means households making more than $1M would pay ordinary income rates on their capital gains if over the threshold, instead of the preferred 20 percent capital gains rate. The president also wants to “eliminate the loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs,” according to the White House Fact Sheet.
Income and Estate Tax Proposals
Some of the proposed changes might motivate individuals to take advantage of tax opportunities now. Knowing what’s coming down the pike will help you proactively plan before any changes occur.
The income tax increase portion of the proposal covers:
- Ordinary Income. The plan includes an increase in top income tax rates from 37 percent today to 39.6 percent for high earners.
- Capital gains. When the net investment income tax is included, the top federal rate on capital gains could nearly double for some, up to 43.4 percent, according to the Tax Foundation, and in some states, would top 50 percent. In Georgia, that top rate could reach 49.15 percent. This could affect the timing of the sale of assets for certain taxpayers in order to realize gains before tax rates increase.
Companies might want to reassess when bonuses are paid to help shareholders balance the income tax rate increase. Additional income paid in 2021 may face a lower tax rate (and less social security tax) than income paid in 2022.
Social Security payroll tax: The plan also proposes a 12.4 percent payroll tax on income earned above $400K. That would be split between the employer and the employee. Currently, that tax is capped on income up to $142,800 for 2021. This could be a 6.2 percent increase in tax to those wages in excess of 400K to employees and a 6.2 percent increase in tax to the employer as well on those same wages.
Under this proposal, estate taxes could be impacted in the following ways:
- Estate Tax Exemption. President Biden’s plan includes that the once $11.7M exclusion would return to $5M, indexed for inflation, and there has been speculation for an even steeper decrease to $3.5M. With the potential for a tax law change coming soon individuals can consider proactively making gifts now to utilize the increased exclusion before it goes away.
- Stepped Up Basis. President Biden’s plan to “end capital income tax breaks and other loopholes” would change the premise of step-up in basis. Step-up in basis for inheritance assets and estates was perceived as a loophole for families to avoid the capital gain tax. President Biden has discussed removing or minimizing this as an option for estates.
What Remains Undefined
The timing for tax increases has yet to be fully defined – possibilities include an effective date of when the bill is introduced, when it becomes law, effective for tax year 2022 or even retroactively effective for tax year 2021. It still seems most likely to be effective for the 2022 tax year for any tax law change but there is precedent to making it retroactive or effective midyear.
It’s important to remember that it’s still unclear when a tax law will pass, how much of it will pass and when it would go into effect.
Contact Us
Windham Brannon’s individual high net worth tax advisors are watching federal legislation closely. Our tax advisors are happy to help you and your family navigate any tax law changes and proactively plan for the future. Contact Doug Neal, CPA with further questions regarding income tax and estate tax changes.
