Biden Tax Proposals: What do I really need to know?
In April of 2021, President Biden released two proposals with far ranging implications that may affect many parts of your life, including your taxes. Below you will find details on these two plans -- the Made in America Tax Plan and the American Families Plan.
Made in America Tax Plan (Infrastructure Bill)
The Made in America Tax Plan is part of the American Jobs Plan, a comprehensive proposal aimed at investing $2 trillion into infrastructure, the production of clean energy, the care economy, and other priorities. The Made in America tax plan implements a series of corporate tax reforms to address profit shifting and offshoring incentives and to “level the playing field” between domestic and foreign corporations. Some of these include:
Raising the Corporate Tax Rate to 28%: Currently the Corporate Tax Rate is at 21% since the Tax Cuts and Jobs Act of 2017. Now, Biden has suggested increasing this tax rate to 28%. However, this initial proposal is shifting amid negotiations and Biden has indicated he may settle for a 25% rate. This change is where Biden hopes to raise the most funds to pay for the infrastructure bill.
Broadening the global minimum tax for U.S. multinational corporations: This would eliminate the incentive to offshore tangible assets by ending the tax exemption for the first 10 percent return on foreign assets. It would also calculate the GILTI minimum tax on a per-country basis, ending the ability of multinationals to shield income in tax havens from U.S. taxes with taxes paid to higher tax countries.
Enacting a minimum tax on book income of large companies: Large corporations that report high profits to shareholders would be required to pay at least a 15 percent tax on book income. The goal of this would be to reduce the loopholes and incentives that many times allow very profitable companies to pay little to no tax, and act as a flat or alternative minimum tax on corporations.
Replacing fossil fuel subsidies with incentives for clean energy production: This would subsidize clean electricity production by providing a ten-year extension of the production tax credit and investment tax credit for clean energy generation and storage, and make those credits direct pay.
Ramping up enforcement to address corporate tax avoidance: This aims to reduce corporations’ tax avoidance and to invest in the IRS by ramping up the enforcement budget to ensure that large corporations are following the rules.
American Families Plan
The American Families Plan is a $1.8 trillion spending bill aimed at education, health care, and child care. It will contain about $1 trillion earmarked for investments and $800 billion for enhanced tax credits. Here is what the plan will do:
Make some pre and post K-12 education free: This includes offering two free years of community college to millions of Americans and universal free preschool for 3 and 4 year old's.
Expand tax credits that help workers and families:
Child Tax Credit→ This plan would extend the increased Child Tax Credit until 2025 (currently set to expire at the end of 2021) -- increasing tax credits for children under 6 from $2,000 to $3,600 and to children over 6 from $2,000 to $3,000. The enhanced portion of the credit is available for single parents with annual incomes up to $75,000, heads of households earning up to $112,500 and joint filers making up to $150,000 a year. Under the relief bill, families can receive half their total credit on a monthly basis -- up to $300 per child up to age 6 and $250 per child ages 6 to 17 -- starting in July and running through the rest of the year. They could then claim the remaining half on their 2021 tax returns. The credit will also be fully refundable for 2021 so more low-income households can take advantage of it.
Child and Dependent Care Tax Credit → The changes to this credit would be made permanent under this plan meaning families can receive a tax credit for as much as half of their spending on qualified child care for children under age 13, up to a total of $4,000 for one child or $8,000 for two or more children. Parents making less than $125,000 annually are eligible for the full credit, while those earning between $125,000 and $400,000 will receive a partial credit.
Earned Income Credit → This plan would make permanent the expansion of the earned income tax credit for workers without children. The relief law bolstered the credit by nearly tripling the maximum credit and extending eligibility to more childless workers. The minimum age to claim the credit would be reduced to 19, from 25, and the upper age limit would be eliminated.
Various Family Incentives: The bill would also ensure no one earning under 150% of state median income has to pay more than 7% of their income on care for children under 5, it would provide comprehensive paid family and medical leave, and it would expand nutrition assistance, including school meal programs. The President also wants to invest more in the child care workforce to bring their wages up to $15 an hour, from the typical $12.24 hourly rate they earned in 2020.
As with anything in life, whenever money is planning to be spent somewhere, there must be a source to at least partially offset it. President Biden has a few different plans as to how he plans to fund the money to be able to enact these changes. Here is how Biden plans to pay for it:
Raise Capital Gains Tax Rate: The proposal would require households earning more than $1 million annually to pay higher taxes on capital gains. The long-term capital gains of these taxpayers would be subject to the top marginal rate for income -- which would be 39.6% under Biden's plan. This is an increase from the top capital gains rate of 23.8 currently.
Taxing Unrealized Capital Gains: Currently, appreciated assets that pass directly to heirs at a death receive a "step-up" in their cost basis, meaning they are revalued as of the date of death and potential capital gains taxes are eliminated. This can minimize the tax burden on the heirs when they eventually sell the assets. And it means the gains accrued during the lifetime of the parent who died are never taxed. Under this plan, Biden would require estates to pay taxes on unrealized gains of more than $1 million, or $2 million per couple. However, family-owned businesses and farms may have some additional exceptions in the bill.
Ending special tax treatment for hedge fund partners and real estate investors: Biden is asking Congress to close the “carried interest” loophole so that hedge fund partners would have to pay ordinary income rates on their income. Currently, the income is often treated as capital gains, which are subject to lower tax rates. Also, he wants to end a tax break (1031 exchange) that allows real estate investors to defer taxation when sell one property but reinvest it in another.
How will this impact me?
Whether or not these changes impact you, remember that as of right now, these plans are just proposals and are still being negotiated. It may be difficult for Biden to get support for these plans, and adjustments are already beginning to occur. Taxes are a fluid structure that are always changing and adapting. It may be beneficial for you to think about how these changes could affect you both positively and negatively. We would love to help you understand more about these plans or about how they might impact you. If you have questions, please reach out to us.