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

• Teacher assistance

• Childcare assistance

• 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.