This plan contains several proposals for changes to individual income and estate tax law. It is the third of three plans put forth by the Administration. The first is the recently enacted American Rescue Plan, which provided additional economic stimulus. The second is the recently introduced American Jobs Plan, an infrastructure bill.
Both The American Families Plan and The American Jobs Plan contain provisions that would change various aspects of tax law. The former would change individual income and estate tax law, while the latter would address corporate taxes. Both plans would need to be approved by Congress and the final laws are likely to look materially different from current proposals. It is too soon to know what tax changes might take effect and when.
However, there are a few key provisions in the plans that we are monitoring closely
For Individual Taxpayers
An increase in the top federal tax bracket.
- The top individual federal income tax rate would rise from 37% to 39.6%. This action would reverse the rate cut enacted under President Trump in 2017. The White House estimates that this change will only affect the top 1% of taxpayers.
An increase in long-term capital gains and qualified dividend tax rates.
- Long-term capital gains would be taxed at ordinary income rates, which are generally higher than current capital gains rates for most taxpayers. This tax applies to the gain on the sale of financial assets like stocks and bonds. However, it would only apply to assets held outside “qualified” or retirement plans. Assets within qualified plans such as IRAs and 401(k) and 403(b) plans are not subject to capital gains taxes
- Qualified dividends, which are a class of dividends that currently receive favorable tax treatment, would also be taxed at ordinary income rates, representing a similar increase as capital gains taxes.
Elimination of the step-up in basis.
- Under current law, at the death of an individual, the cost bases of their assets are changed to their fair market values at the date of death. The application of a “stepped-up” cost basis to assets often allows more wealth to pass to one’s heirs, since the appreciation during one’s life is not subject to capital gains tax at death. The plan proposes to eliminate this step-up in basis, which would increase the amount of capital gains subject to tax at death.
- This proposed change has the potential to impact many of our clients and may require further estate planning, including the acceleration of lifetime gifts, before any future tax changes take effect.
- Under current law, allowable deductions include mortgage interest, charitable contributions, state and local taxes (limited to $10,000) and investment interest expense. Under the proposal, itemized deductions would carry a maximum tax benefit of 28% of total deductions.
- The corporate tax rate would rise from 21% to 28%. A 15% minimum tax would apply to corporate book income.
- American corporations’ foreign income generally would be subject a tax of 21% which represents a substantial increase from rates that are often in the single digits.
Estate and Gift Tax
- The Biden Administration did not include any of the estate and gift tax changes that were proposed during the campaign. These proposals included a reduction of a taxpayer’s federal unified exemption from estate and gift taxes from the current $11.7 million (inflation-adjusted) amount to as low as $3.5 million, as well as an increase in the estate and gift tax rate from the current 40% rate to 45%.
- Though no changes were proposed in the American Families Plan, many Democrats have expressed support for lowering the threshold for estate and gift tax as a way to fund their legislative agenda.
- Two bills have recently been introduced – one by Senator Bernie Sanders (I-VT) and another by Senator Chris Van Hollen (D-MD) – that focus on a more progressive estate tax and reduce the lifetime gift exemption. They also propose changes to the tax treatment of property passing through an estate. These proposals are in the early stages of development and may look materially different if they are passed into.
The proposals described above are likely to move quickly through the House of Representatives, but between Senate consideration and further negotiations between both houses of Congress, may emerge with watered-down provisions and a focus on those items with the greatest potential for raising tax revenue (e.g. corporate taxes). As mentioned, it is too soon to tell when any changes might take effect, including whether some would be phased in over time. It is also too soon to determine whether any of the proposed changes will be retroactive. Given that the federal government is doing everything it can to stimulate a post pandemic economy, raising taxes, at least in the short-term, would be counterproductive to that effort.
We will continue to watch this legislation closely and would be happy to discuss with you any planning opportunities, given your individual circumstances.