Curious About the New Biden Tax Plan? I’ve Got You Covered.
A couple nights ago, President Biden addressed the nation and unveiled his American Families Plan. The key tax benefits are an increase in the Child Tax Credit from $3,000 to $3,600 per child through 2025 and a permanent increase in the Child and Dependent Care Credit to $4,000 per child with an $8,000 cap. Other benefits include:
Free universal pre-school for 3- and 4-year-olds
Free community college
Comprehensive paid family and medical leave
Expanded child nutrition and school meal programs
Expanded ACA premium tax credits
Of course, with benefits come costs. Here is the plan to pay for the goodies:
Increase in the top individual rate from 37% to 39.6%. That top rate would apply to taxable income over $452,700 (single) and $509,300 (married). The current income thresholds for the top tax rates are $523,600 (single) and $628,300 (married).
Increase in the corporate tax rate from 21% to 35%. You may remember that the corporate tax rate was 35% before 2017. This will be a big deal to some, but most small businesses operate as passthrough entities and sole proprietorships that will be unaffected tax-wise from this increase.
Increased IRS resources to audit high income taxpayers. (Fun)
Increase in the capital gains rate to 39.6% for taxpayers with over $1 million in income. Once I learn more about how this works, this will be an entire discussion topic. For non-business capital gains, this would presumably also trigger the net investment income tax of 3.8%, making the full rate 43.4% on these transactions. (Yikes)
The last one is obscure but meaningful. Currently, inherited assets receive a step-up in basis to the beneficiary. Because most estates are not taxable, this step-up is tax-free. The American Families Plan would apply a tax to the inherited gains in an estate. There is a $1 million gain exemption that would apply. This too will be a full discussion topic if this comes to pass. As you might imagine, Republicans oppose all of this.
Many of these provisions will be altered during the legislative process; however, this does give us more concrete evidence of what President Biden’s tax priorities are. Stay tuned for updates and guidance on possible enactment dates.