What You Need to Know About President Joe Biden’s Tax Proposals

The proposed $1.8 trillion American Families Plan (AFP) would represent a sweeping overhaul to the US tax system that could impact individuals.

Unveiled by President Joe Biden on April 28, 2021, the plan is part of the Build Back Better policy initiative, joining the $2.3 trillion American Jobs Plan (AJP) and the Made in America Tax Plan (MATP) that could impact corporation and businesses with international operations.

While these plans are simply proposals with legislation yet to be drafted, they propose significant investments in domestic policy initiative and warrant monitoring further developments. An overview of the notable potential impacts of the proposals follows.

Individual Tax Proposals

The proposed laws contained in the AFP could have significant implications for select taxpayers.

Certain individuals could face an overall tax rate that tops 50% when combining the increase in capital gains, broadening of the net investment income tax (NIIT), and increase in ordinary rates.

As proposed, the AFP would reverse several provisions promulgated by the 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA), and other parts of the tax code that benefit taxpayers in higher income brackets. Subject taxpayers could be impacted by the following changes.

Individual Tax Rates

The AFP proposes to return the tax rate for the top income bracket to Obama administration levels, from the current 37% to 39.6%; however, it isn’t clear if the income tax brackets will be adjusted along with the rate.

For reference, in 2021 the top tax rate begins at $523,601 for single taxpayers and $628,301 for married taxpayers filing jointly.

Capital Gains and Qualified Dividend Income

As proposed, the AFP would tax long-term capital gains and qualified dividend income as ordinary income if the taxpayer has more than $1 million in income during the taxable year.

As mentioned above, the proposed highest ordinary individual tax rate is 39.6%, therefore, capital gains and qualified dividends would be taxed at that higher rate. Long-term capital gains and qualified dividends are currently taxed at a top rate of 20%, depending on taxable income and filing status.

Net Investment Income Tax (NIIT)

NIIT generally applies to investment income where a taxpayer’s modified adjusted gross income exceeds:

  • $200,000 for single tax filers
  • $250,000 for joint filers
  • $125,000 for married taxpayers filing separately

The AFP proposes to broaden the application of the NIIT by applying it to all income over $400,000 rather than solely investment income.

Stepped-Up Basis for Property Inheritance

Generally speaking, where property is inherited, the tax basis of the property gets a so-called step up in basis; this means that upon the decedent’s death, the property takes on a fair market value (FMV) basis rather than maintaining the decedent’s original basis in the property.

This arrangement is generally seen as advantageous because the gain on appreciated assets isn’t subject to taxation if the heir disposes of the assets at death.

As proposed, AFP imposes limits on stepped-up basis. Specifically, it ends the practice for gains that exceed $1 million, or $2.5 million per couple when combined with existing real estate exemptions.

However, it’s been indicated that the proposal could have exceptions for property donated to charities and family-owned businesses and farms.

Carried Interest

As proposed, so-called carried interest—a hedge fund manager’s contractual right to a share of a partnership’s profits—would be subject to ordinary tax rates.

Currently, carried interest is taxable at the capital gains rate under certain conditions.

Like-Kind Exchanges

Generally, Section 1031 exchanges, also known as like-kind exchanges, allow a taxpayer to defer the recognition of a gain on the exchange of real property held for investment to use in a business where the property is exchanged solely for similar property.

The AFP proposes to end the deferral of gains of more than $500,000.

Child Tax Credit (CTC)

In March of 2021, the American Rescue Plan Act (ARPA) temporarily increased the CTC from $2,000 to $3,000 for certain taxpayers for each child age six through 17, and credits of $3,600 for each child under age six. It also makes the credit fully refundable in most cases.

As proposed, the AFP would extend these CTC increases through 2025 and allow the credit to be fully refundable on a permanent basis.

Child and Dependent Care Tax Credit

Under the ARPA, taxpayers may temporarily claim a refundable 50% credit for up to $8,000 in care expenses for one child or dependent and up to $16,000 in expenses for two or more children or dependents.

The MATP plan also proposes to partially or fully replace the FDII regime with a namesake 10% tax credit applicable to qualifying expenses incurred that aims to return production to the United States, revitalize manufacturing plants, and increase wages paid to US manufacturing workers.

The credit begins to phase out when household income levels exceed $125,000; for households with income over $400,000, the credit can be reduced below 20%.

The AFP would leave this increase in place permanently. Families with an income between $125,000 and $400,000 would receive a partial credit.

Business Tax Proposals

The Build Back Better plan currently includes three separate plans addressing a subset of issues. While the ARPA and AFP are generally geared toward individuals, the MATP plan generally focuses on corporate taxes.

The following are some of the most significant changes for business taxpayers in the MATP plan.

Corporate Tax Rate

As proposed, the MATP would increase the corporate tax rate to 28%. This is still lower than the pre-TCJA corporate tax rate of 35%.

In addition, the MATP plan proposes to implement a 15% tax on book income.

Flow-Through Entities

Under the proposal, the qualified business income (QBI) deduction could be phased out for business owners whose annual income exceeds $400,000.

Other Incentives

In addition, the AJP provides tax incentives and other support for businesses, including:

  • $52 billion to promote domestic manufacturing
  • $31 billion for small business programs expanding access to credit, venture capital, and research and development funding

Further, the plan proposes credit programs related to clean energy generation and storage as well as expanding the Section 45Q carbon credit.

International Provisions

Global Intangible Low-Taxed Income (GILTI)

The MATP proposes to:­

  • Raise the GILTI rate to 21% (up from 10.5%) and impose it on a country-by-country basis
  • Eliminate the GILTI exemption for qualified business asset investments (QBAI)

Foreign-Derived Intangible Income (FDII)

The MATP plan also proposes to partially or fully replace the FDII regime with a namesake 10% tax credit applicable to qualifying expenses incurred that aims to return production to the United States, revitalize manufacturing plants, and increase wages paid to US manufacturing workers.

The MATP tax would impose a 10% surtax on corporations that send manufacturing and service jobs overseas when goods are ultimately sold back into the United States. This could raise the effective corporate tax rate on associated activity to 30.8%.

It would also establish a claw-back provision to require companies to return public investments and tax benefits when they eliminate jobs in the United States and send them overseas.

IRS Administrative Proposals

On the tax administration side, the AFP calls for an increase in the funding of IRS tax enforcement of $80 billion over 10 years. This nearly doubles the agency’s 2021 enforcement budget.

The funds would be used to further study and provide additional enforcement with respect to multinational corporations, partnership groups, and top-earning individuals, however not those households with less than $400,000 in annual income.

On the reporting side, the AFP would also require financial institutions to report information on balances and account flows to better track earnings from investment and business activities.

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To learn more about how these proposals could impact your business or personal finances, contact your Moss Adams professional.

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