President Biden’s April 28 “Fact Sheet: The American Families Plan” contains numerous tax breaks for low and middle earner taxpayers and numerous tax increases on taxpayers “making over $400,000 per year.”
The Fact Sheet also contains proposals for increasing tax compliance. Those proposals are explained in detail by a Treasury Department press release. For more on that press release, see Treasury details Biden administration proposals to address the tax gap, tax compliance.
Tax breaks.
Here is a summary of the tax breaks in the Fact Sheet:
Extend expanded ACA premiums tax credits in the American Rescue Plan. The American Rescue Plan Act of 2021 (PL 117-2; the American Rescue Plan) expanded the Code Sec. 36B premium credit that is available to many persons who are enrolled in an Exchange-purchased qualified health plan, thus, in effect, lowering health plan premiums for those persons. This expansion applies to 2021 and 2022.
The American Families Plan would make those premium reductions permanent.
Extend the Child Tax Credit increases in the American Rescue Plan through 2025 and make the Child Tax Credit permanently fully refundable. The American Rescue Plan made several changes to the Child Tax Credit for 2021. For example, it expanded the Child Tax Credit from $2,000 per child to $3,000 per child for children six years old and above, and $3,600 per child for children under six. It also made 17-year-olds eligible to be qualifying children for the first time and made the credit fully refundable. And, it provided for advance periodic payment of the credits.
The American Families Plan would make permanent the full refundability of the Child Tax Credit, while extending the other expansions to the Child Tax Credit through 2025. “The credit would also be delivered regularly.”
The Fact Sheet says that the President is committed to working with Congress to achieve his ultimate goal of making permanent the Child Tax Credit as well as all of the expansions he signed into law in the American Rescue Plan.
Permanently increase the Child and Dependent Care Credit. The American Rescue Plan made the following changes to the Child and Dependent Care Credit for 2021: it increased the amount of the credit for many taxpayers and made the credit refundable.
The American Families Plan would make these changes permanent.
Make the Earned Income Tax Credit expansion for childless workers permanent. The American Rescue Plan made changes that roughly tripled the Earned Income Tax Credit (EITC) for childless workers for 2021.
The American Families Plan would make these changes permanent.
Observation.
The American Rescue Plan made a number of changes to the EITC for childless workers for 2021. It isn’t clear, from the Fact Sheet’s “roughly tripled” language, whether the American Families Plan would make all of the American Rescue Plan changes permanent or, instead, would only make some of those changes permanent.
Tax increases.
Here is a summary of the tax increases in the Fact Sheet:
Increase the top tax rate to 39.6%. The President’s plan would restore the top tax bracket to what it was before the 2017 Tax Cuts and Jobs Act (PL 115-97), returning the rate to 39.6%, applying only to those within the top 1%.
Increase the tax on capital gains for high earners. The Fact Sheet says, “Households making over $1 million—the top 0.3% of all households—will pay the same 39.6% rate on all their income, equalizing the rate paid on investment returns and wages.”
Observation:
This appears to mean that households making over $1 million will pay ordinary income tax rates on their capital gains and qualified dividend income, not that all of the household’s income will be subject to the 39.6% rate, or that all of its capital gains and qualified dividend income will necessarily be subject to the top rate. The Fact Sheet does not discuss an income-based phase-in for this rule.
Reducing the step-up in basis at death for some taxpayers. The President’s plan would end the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) at death and would tax the gains if the property is not donated to charity. The reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.
Change taxation of carried interest. The President is also calling on Congress to close the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income.
Cut into the rule for like-kind exchanges. The President would eliminate the like-kind exchange rule with respect to gains greater than $500,000 on real estate exchanges.
Make the excess business loss rules permanent. Under Code Sec. 461(l), for non-corporate taxpayers in tax years beginning after Dec. 31, 2020, and before Jan. 1, 2026, the “excess business loss” of the taxpayer for the tax year, if any, is disallowed. With some modifications, an excess business loss is
- The excess of the taxpayer’s aggregate deductions for the tax year that are attributable to trades or business of the taxpayer over
- The taxpayer’s aggregate gross income or gain attributable to those trades or businesses plus
- A threshold amount.
Any disallowed excess business loss is taken into account in determining whether there is an NOL carryover to the following tax year under Code Sec. 172. The American Families Plan would make this rule permanent.
Close loopholes in the 3.8% net investment income tax. Certain unearned income of high-earner individuals, estates, and trusts is subject to a surtax of 3.8%. (Code Sec. 1411)
The Fact Sheet says that the application of this provision is “inconsistent across taxpayers due to holes in the law” and says that the President’s proposal “would apply the taxes consistently to those making over $400,000.”
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