On April 28, 2021, President Biden announced the American Families Plan (AFP). The AFP was released “as an investment in our kids, our families, and our economic future.”
The plan includes $1.8 trillion in investments and tax credits for American families and children over 10 years. It also includes about $1 trillion in investments and $800 billion in tax cuts for American families and workers. Alongside the American Families Plan, the president will propose a set of measures to ensure, according to the plan, “that the wealthiest Americans pay their share in taxes,” while ensuring that no one making $400,000 per year or less will see their taxes go up.
The AFP gives our individual clients access to community college, preschool, affordable child care and paid leave. Proposals within the AFP also impact our business clients, specifically in the area of like-kind exchanges and estate planning.
As of this writing, the AFP is currently a proposal and not federal tax law. This blog will highlight the proposed tax provisions of the AFP. There are additional non-tax-related proposals presented in the AFP that can be read in the White House’s fact sheet.
Extension of tax cuts
The AFP proposes extending the key tax cuts in the American Rescue Plan (ARP):
- Child tax credit (CTC)
- CTC enhancement will be extended through 2025
- CTC will be expanded from $2,000 per child to $3,000 per child for children age six years and older, and $3,600 per child for children under age six
- AFP will make the CTC permanently fully refundable
- AFP will deliver regular payments of the credit
- Earned income credit (EIC)
- EIC will be permanently expanded to include childless workers
- Child and dependent care tax credit (CDCTC)
- CDCTC will be made permanent
- Families will receive a tax credit for as much as half of their spending on qualified childcare for children under age 13, up to a total of $4,000 for one child or $8,000 for two or more children
- A 50% reimbursement will be available to families making less than $125,000 a year, while families making between $125,000 and $400,000 will receive a partial credit
- The credit can be used for expenses ranging from full-time care to after school care and summer care
- Expanded health insurance tax credits
- Makes permanent premium reductions for taxpayers who purchase health insurance coverage on their own
As a side note, the IRS, on May 10, 2021, released guidance (IR 2021-105) on the taxability of dependent care assistance programs for 2021 and 2022. Due to the pandemic, many people were unable to use the money they had set aside in their 2020 and 2021 dependent assistance programs.
Notice 2021-26 clarifies for taxpayers that if these dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not considered wages of the employee for 2021 and 2022.
- Restores the top tax federal bracket to 39.6%
- Top marginal rate would be 43.4% (39.6% + 3.8%) when including the 3.8 % net investment income tax (NIIT) (excluding any state income tax)
- For households over $1 million, capital gains rates would increase from 20% to 39.6%
- Factoring in the NIIT, capital gains rates for those over $1 million would also be 43.4%
- The proposal states: “High-income workers and investors generally pay a 3.8% Medicare tax on their earnings, but the application is inconsistent across taxpayers due to holes in the law. The ARP would apply the taxes consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.”
The language in the proposal is somewhat vague. It would seem NIIT would be extended to all income (for example, non-investment income, flow-through income) above the threshold, and the NIIT would be called the Medicare Tax. This would mean the NIIT applies to the sale of business assets.
Limiting step-up basis at death
- Ends stepped up basis for gains in excess of $1 million ($2 million per couple)
- No tax would be due for a gift to charity
- Proposal includes an exception for family-owned businesses and farms that are given to heirs that continue to run the business
The proposal states: “The president’s plan will close this loophole, ending 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) and making sure the gains are taxed if the property is not donated to charity.” It does not address what would happen at death.
Some are reporting this to mean, at death of a taxpayer, the taxpayer’s assets are treated as sold, and gain in excess of the $1 million/$2 million threshold would be subject to tax. Until legislation is finalized, we will not know if this is an accurate assessment.
The gain from the sale of a primary residence would also be excluded. This would mean a married couple could exclude $2.5 million ($1 million + $1 million + $500,000) in gain from taxation at death, assuming the exemption is portable.
Limited like-kind exchange tax deferral
- Ends §1031 tax-free like-kind exchanges for real estate gains in excess of $500,000
Once again, there are limited details on the mechanics of how this would work. How is the $500,000 treated, and is it deferred? Is it subject to NIIT (remember under the AFP, all income over $400,000 is subject to NIIT)? Deferred from NITT?
Limitation of excess business losses [§461(l)]
- Makes permanent the limitation on excess losses
- Currently, business losses in excess of $250,000 ($500,000 MFJ), that are indexed for inflation and not deductible, become net operating losses (NOL) [§461(l)]
End of capital gain treatment for carried interests
Paid tax preparer regulation
- Gives the IRS the authority to regulate paid tax preparers
- Asks Congress to pass bipartisan legislation to give the IRS the authority to regulate
Per the proposal, “As preparers play a crucial role in tax administration and will be key to helping many taxpayers claim the newly-expanded credits, IRS oversight of tax preparers is needed.”
The end result of paid tax preparer regulation may be a great thing for those in practice looking to expand their operations or add staff. More regulation may result in more business opportunities, as it is anticipated some preparers will be leaving the industry and some taxpayers who are currently self-preparing may seek the advice of professionals due to increased complexity.
Other proposals are out there as well. Below are some you may be hearing about on the news or from your clients. We will provide a high-level discussion to create awareness, so you are able to address client concerns, if they do arise.
The House Ways and Means Chairman Richard Neal introduced the Building the Economy for Families Act on April 27, 2021 (a day prior to President Biden’s plan).
This proposal contains many of the same ideas as the AFP. Below are highlights of the proposed tax impacts:
- §24 of the IRC would be amended to include changes to the CTC
- Fully refundable; amount increases to $3,000 per child ($3,600 under age 6)
- ARP changes would be permanent
- Makes permanent the temporary expansion the eligibility and the amount of the earned income credit for taxpayers with no qualifying children (childless EIC)
- Reduces minimum age to claim the childless EIC from 25 to 19 (except for certain full-time students), and the upper age limit is eliminated
- Amounts are indexed for inflation and will be indexed beginning in 2022
Introduced in late March 2021 by senators Elizabeth Warren, Chris Van Hollen, Cory Booker, Sheldon Whitehouse and Bernie Sanders, Sensible Taxation and Equity Promotion (STEP) Act is another proposal to end the stepped-up basis loophole.
Also introduced in late March 2021 by Sanders, the 99.5 Percent Act contains changes to the current federal estate and gift tax rules.
As of today, none of the above proposals are legislation. They are simply proposals. We do not know what, if anything, will become final legislation.
NATP is here to keep you informed of any new legislation and our hope is the above as provided you with some of the information necessary to address any client concerns as they arise.