On April 28, 2021, more information about President Joseph R. Biden, Jr.’s “Build Back Better” package was revealed with the release of a highly anticipated fact sheet outlining the president’s “American Families Plan.” The plan has a domestic focus aimed at providing “an investment in our kids, our families, and our economic future” and is the second part of the president’s two-part package (part one, the “American Jobs Plan,” focuses on infrastructure and was outlined on March 31). The outline of the American Families Plan also includes a number of tax-related proposals that the fact sheet estimates would raise about $1.5 trillion over 10 years and, in combination with the tax proposals in the “Made in America Tax Plan” that accompanies the American Jobs Plan, would fully pay for the president’s Build Back Better agenda over the next 15 years.
Here’s a look at the tax-related proposals included in the latest fact sheet with tax changes targeted at high-income Americans:
- Revitalize enforcement of the U.S. tax system by requiring financial institutions to report information on account flows and increase investment in the IRS
- Increase the top tax rate to 39.6 percent (from the current 37 percent)
- Increase the top capital gains tax rate to 39.6 percent for “households making over $1 million”
- 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) with protections provided for family-owned businesses and farms
- Eliminate the preferential capital gains treatment for carried interest arrangements
- Eliminate like-kind exchanges, which allow real property to be exchanged on a tax-free basis, for gains greater than $500,000
- Permanently extend the excess business loss limitation, which limits aggregate deductions attributable to trades or businesses over the aggregate amount of gross income and gain attributable to trades or businesses to an inflation-adjusted $250,000 ($500,000 for married couples) with the excess treated as a net operating loss
- Remove the wage-based cap for the 3.8 percent Medicare tax on earnings for “those making more than $400,000”
As generally expected, the proposals included in the American Families Plan are generally consistent with the proposals the president campaigned on; however, there are a few notable omissions, and the following campaign proposals are not included in the recently released plan:
- Limit itemized deductions by restoring the phaseout of deductions for adjusted gross incomes above $400,000, and limit the overall benefit to 28 percent for those in the top tax brackets
- Eliminate the current cap on the itemized deduction for state and local taxes paid or accrued (not in connection with a trade or business)
- Create new retirement incentives
- Reduce the estate and gift lifetime exemption to “normalized amounts”
- Curtail the use of valuation discounts and certain wealth transfer strategies
- There is no specific reference in the proposal that would disallow the 20 percent qualified business income deduction
What are the chances of the proposed tax changes included in the American Families Plan actually becoming law? The outlook on tax change remains uncertain at this time, and there are both momentum and headwinds to enactment this year. While the White House plans to negotiate the legislation on a bipartisan basis, there are few signs of support from Republicans for tax increases on corporations or individuals. As a result, the legislation will likely need to advance under the budget reconciliation process, which was just used to enact the American Rescue Plan Act of 2021 last month. In a recent key development, the Senate Parliamentarian—the nonpartisan “referee” of the budget reconciliation process—ruled on April 5 that a budget resolution can be revised to generate a new set of budget reconciliation instructions. This may broaden the legislative paths available for legislation to advance without bipartisan support later this year using budget reconciliation.
Although uncertainty can be challenging to navigate, we saw similar levels of uncertainty in recent history with the so-called “fiscal cliff” at the end of 2012 and the build up to the Tax Cuts and Jobs Act in 2017, and a top takeaway from these experiences is that modeling the potential tax effect of these proposals can be both an insightful and important exercise. For example, business owners contemplating a sale of their businesses in the next few years should consider these potential tax increases as they determine their timeline. Click here for an exhibit illustrating the potential tax implications of a transaction with a $100 million enterprise value under both current tax law and the White House’s current tax proposals.
BKD is here to help you navigate the current uncertain tax landscape and plan for what’s ahead, regardless of what happens in Washington later this year. For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.