Biden Administration Tax Proposals: What’s Included, What’s Not, and What to Consider

The White House in Washington DC

The White House on April 28 released its “American Families Plan,” which outlines the Biden administration’s goals for investing in children, families and U.S. workers. The plan would include $1 trillion of spending and $800 billion of tax cuts over a 10-year period. It would largely be funded by tax increases targeted for high-income taxpayers, raising $1.5 trillion over a decade.

What’s in the Proposed Plan

  • Top Individual Income Tax Rate would rise from 37% to 39.6%, thus restoring the top rate that was in place prior to the Tax Cuts and Jobs Act (TCJA). The income range that would apply for the top rate is unknown at this time, though an anonymous White House official cited $452,700 for single filers and $509,300 for joint filers.
  • Long-Term Capital Gains & Qualified Dividends tax rates would increase from 20% to 39.6% for “households making over $1 million”; it is unclear whether the cited $1 million threshold relates to taxable ordinary income or investment income.
  • Step-Up in Cost Basis at Death. The proposal would repeal the current step-up in cost basis for inherited assets with gains exceeding $1 million (or $2 million for couples); certain protections would be created for family-owned businesses and farms where the heirs will continue to operate those businesses. This change will not impact the home sale gain exclusion of $250,000 for single filers or $500,000 for couples.
  • 3.8% Medicare Tax on Net Investment Income (NII). The scope would be expanded to cover all unearned income.
  • Carried Interest would be taxed at ordinary income rates; per the White House’s fact sheet, “permanently eliminating carried interest is an important structural change necessary to ensure we have a tax code that treats all workers fairly.”
  • Section 1031 Like-Kind Exchanges. The plan as proposed would repeal tax deferment on such exchanges for gains greater than $500,000.
  • Additional IRS Funding would provide $80 billion over 10 years for additional IRS enforcement of tax evasion, which the administration believes could net more than $700 billion of tax revenue over 10 years.

What’s Not in the Plan

The American Families Plan excluded several notable items that taxpayers may have expected, though these items could be addressed in subsequent legislation:

  • Estate Exemption. Given prior statements to return the estate exemption to “historic norms,” many anticipated a push to lower the exemption to a range of $3.5 million to $5 million per person (from $11.7 million currently), with a top tax rate of 45% (from 40% currently). The American Families Plan did not address this, however, it bears noting that Senator Bernie Sanders proposed the “For the 99.5 Percent Act” which would make significant changes to estate planning limits.
  • Limit on Itemized Deductions.  President Biden had previously called for limiting the benefit of itemized deductions to 28% for taxpayers earning more than $400,000.
  • Social Security Taxes. To shore up the Social Security Trust Fund, the administration had previously proposed collecting additional OASDI taxes (6.2%) for earnings above $400,000 (whereas OASDI tax is not currently collected on earnings above $142,800).
  • State and Local Tax (SALT) Deduction. Many Democratic lawmakers have called for either an increase or a full repeal of the current $10,000 limit on the SALT itemized deduction.
  • Section 199A Deduction. It had been assumed that the special tax treatment afforded for pass-through business income might be phased out above certain income thresholds.

What’s Next

Democrats will need almost complete unity in Congress for any chance to pass the legislation, since few (if any) Republicans will vote in support of legislation including significant tax increases. In the Senate, Democrats hold just 50 seats. As such, any opposition from moderates/centrists such as Joe Manchin of West Virginia or Kyrsten Sinema of Arizona (among others) could doom the proposed legislation. Meanwhile, in the House, Nancy Pelosi presides over the slimmest Democratic majority since World War II (218-212 margin), for which even a few party dissenting votes could prove costly. In April, a group of 17 New York House Democrats sent a letter to House Speaker Pelosi noting that they reserved the right “to oppose any tax legislation that does not fully restore the SALT deduction.”

Certain proposals are considered more likely to pass than others. Taxpayers should consider this a fluid situation with room for substantial changes ahead. With income tax rates near historic lows, many tax practitioners think there is a very good chance for a return of the top individual income tax return to 39.6%. Conversely, the proposal to overhaul the step-up in basis at death (a common fixture of estate planning since the Revenue Act of 1921) is considered controversial and could draw opposition from both sides of the aisle. As for the proposal to nearly double the current tax rate on long-term capital gains and qualified dividends for certain high-income individuals, some tax practitioners think an increase from 20% to a range between 25% to 30% is a more possible outcome.

Implementation

One of the many challenging questions faced by taxpayers is: If tax reforms are passed, when might such changes become effective? Given the pandemic and the continued economic recovery, most tax practitioners think any tax increases likely would wait until 2022. Tax changes could be applied on a retroactive basis, though that risk seems rather low; of the six major rate increases since 1980, in just one instance (1993) were increases applied retroactively.

Planning Considerations

In light of these recently announced proposals, here are the key things you should keep in mind:

  • Don’t Overreact to the Unknown. No one enjoys paying taxes; however, taxpayers should not embark on financial decisions that could jeopardize their financial game plan in the hopes of saving on future taxes.
  • Early Coordination is Key. Those who might be impacted by the proposed changes should coordinate with their trusted team of advisors (accountant, estate planning attorney, investment advisor) to assess current or possible future planning opportunities.
  • Be Prepared to Act. As negotiations unfold over the coming weeks and months, high-net-worth individuals should consider whether to move forward on planning opportunities. While revising estate planning limits was not included in the current proposal, the current exemption at $11.7 million per person presents a unique window for wealthy individuals to shift assets out of their taxable estate.
  • Location, Location, Location. Just as the adage applies to real estate, it is also true with asset location among taxable and tax-deferred investment accounts. Given the potential for a higher tax rate to be applied to long-term capital gains and qualified dividends, taxable investors should review asset location to determine if the portfolio is positioned for tax efficiency.

Do you have questions? For more information, please reach out to us directly at 770-368-9919 or email Cliff, cliff@cwoconner.com or Kevin, kevin@cwoconner.com.

This report is intended for the exclusive use of clients or prospective clients of C.W. O’Conner Wealth Advisors. The information contained herein is intended for the recipient, is confidential and may not be disseminated or distributed to any other person without prior approval of C.W. O’Conner Wealth Advisors. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecasts represent future expectations and actual returns, volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is a possibility of a loss.

Cliff is the founder and president of C.W. O'Conner Wealth Advisors, Inc. Cliff earned a Bachelor of Business Administration degree in Accounting from Georgia State University.