What’s Included in the Biden Tax Plan?

It seems like there has been a flurry of legislative activity now that the COVID-19 vaccine has been developed and made readily available. Somewhere between COVID and the debate of infrastructure, the Biden administration released the summary of their tax plan. Known as the American Families Plan (“AFP”), there are quite a few changes included which bear some review.

Income Tax Changes:

The AFP proposes an increase in the highest marginal tax rate from 37% to 39.6% beginning in 2022. The highest rate would apply to single taxpayers with income exceeding $452,700 and married joint files with income exceeding $509,300 each with an index for inflation. The current 37% rate was part of the Tax Cuts and Jobs Act passed during the Trump administration This rate was scheduled to sunset and to return to 39.6% in January of 2026, therefore this seems to accelerate only slightly what was supposed to occur. While the highest marginal rate is discussed, there is no discussion in the AFP regarding other tax brackets.

In addition to the change in the highest marginal tax rate is a sweeping proposed change to capital gains taxation. Currently, long term capital gains are taxed at a rate of 0%, 15%, or 20% depending on other income. However, the proposal would change capital gains so that they would be taxed as ordinary income tax rates. Effectively this means that capital gains for taxpayers in the highest marginal tax bracket would be taxed at 43.4% since they would be subject to the highest tax rate of 39.6% plus the net investment income tax of 3.8%. As proposed, this would only apply to taxpayers with income exceeding $1 million.

Estate Tax:

The current estate and gift tax unified credit allows a taxpayer to pass $11.7 million of property to heirs without paying an estate tax. In addition, the spouse of a deceased taxpayer can file an estate tax return and elect to have any unused estate tax credit transferred to themselves, thus allowing married couples to pass up to $23.4 million in assets without paying an estate tax. In addition, beneficiaries receive inherited property with a “step-up” in basis meaning that their basis for capital gains tax purposes is the fair market value of the inherited asset as of the time of the decedent’s date of death. For years, estate planners have speculated that there would be a reduction in the estate tax exemption. However, the AFP contains no such reduction. Instead, the AFP proposes to require a decedent’s estate to pay capital gains tax on appreciated assets. Under the AFP, a decedent’s estate would pay capital gains on the difference between the fair market value of the decedent’s assets on the decedent’s date of death and the decedent’s basis in those assets.

A surviving spouse would no longer receive a step-up in basis in assets inherited from his or her spouse. Instead, a spouse would receive carry-over basis and would be subject to paying the capital gains tax if they gift the property during their lifetime or at their death. The AFP proposes a $1 million exclusion per taxpayer, which can be transferred to a surviving spouse, thus allowing an exclusion of up to $2 million in capital gain. In addition, taxes on appreciation of family-owned businesses and certain other non-liquid assets, could be stretched over a 10- or 15-year period.

The AFP includes many other changes to tax rules including the elimination of like-kind exchanges, increased tax credits for childcare and low-income taxpayers, increased tax rates for corporations, and increased funding for the IRS for the purpose of increasing the number of audits done annually.

While it remains to be seen what parts of the Biden tax plan are actually passed, there are a number of provisions included which will be critical to watch.

Ask the Attorney

Client: How can I avoid estate taxes?

Attorney: Estate taxes can be avoided or reduced with proper planning. This planning can include the use of lifetime gifts, valuation discounts, and irrevocable life insurance trusts. Prior planning is imperative for families with a net worth in excess of $5 million.

Ask Dan

Hook Law Center: Hey Dan – why do dogs lick their humans?

Dan: Hi reader – what a great question. Dogs have licking in their blood and it all begins when they are born. Dog Moms lick their puppies to keep them clean and to make sure they eat when they are young. Humans have salty skin which tastes good to dogs so sometimes they lick just for the salty taste. An older dog may lick his or her human as a sign of submission to their owner. However, most experts believe that when a dog licks their human it is just a form of communication and affection.