President Biden Proposes Tax Increases for Wealthy Individuals and Greater Funding for IRS Enforcement

The American Families Plan includes $1 trillion in investments and $800 billion in tax credits aimed towards children and families. To finance these objectives, the plan contains a number of tax provisions targeting high-income individuals and providing for increased IRS enforcement activity. The plan represents the second part of President Joseph Biden’s Build Back Better agenda, following the $2.3 trillion American Jobs Plan released a few weeks ago.

The American Families Plan would:

• Repeal the step-up in basis for inherited assets for gains in excess of $1 million per person ($2.5 million for a married couple when combined with existing real estate exemption under Sec. 121)
  • Proposal would include special rules for family-owned businesses or farms that are passed on to heirs who continue to run the business
• Raise the top marginal income tax rate for individuals to 39.6% from 37%
• Apply the 3.8% Medicare tax to all income and earnings over $400,000
• Raise the qualified dividends and capital gains rate to 39.6% from 20% for households making more than $1 million per year, effectively taxing such gains at ordinary rates
  • When combined with the 3.8% tax proposal above, this would raise the total capital gains rate to 43.4%
• Require that income and gains received from carried interest be taxed as ordinary income
• Permanently extend the limitation on excess business losses of noncorporate taxpayers under Sec. 461(l)
• Repeal real estate like-kind exchanges for gains greater than $500,000 (personal property like-kind exchanges were previously repealed by TCJA)
• Provide additional IRS enforcement funding over the next 10 years to increase enforcement activities for wealthy individuals, estates, businesses and large corporations
• Provide IRS with expanded authority to regulate tax preparers
• Extend the American Rescue Plan’s increase in the child tax credit (to $3,000 ($3,600 per child under six) from $2,000 per child) through 2025 and make it fully refundable
• Permanently extend the American Rescue Plan’s expansion of the child and dependent care tax credit

Information Reporting

The enforcement funding mentioned above would also be paired with new requirements for financial institutions to report information to IRS on account flows related to investments and business activity.

No Estate Tax Expansion or Other Campaign Proposals

Among the measures discussed in the campaign, and in recent weeks leading up to the announcement of the American Families Plan, was an expansion of the estate tax. However, under President Biden’s plan, the current estate tax exemption thresholds would not be reduced and the current estate tax rates would not be increased.

Also notably absent are other proposals from President Biden’s presidential campaign including an increase in payroll taxes on upper income individuals, changes to itemized deductions (including increasing or repealing the SALT limitation), and the elimination of the 20% deduction for pass-through business income added under Sec. 199A.

The Takeaway

The American Families Plan is the second piece of the administration’s infrastructure proposal. When combined with the American Jobs Plan, it would result in significant changes to tax provisions affecting both corporate and pass-through businesses, as well as individuals. At this point, it is unclear whether all or a portion of the tax changes will be enacted into law. Republicans are expected to oppose the tax increases and some Democrats are reluctant to support an infrastructure package without bipartisan support. In addition, it is possible that some members of Congress may have different views than the administration regarding the extent to which income tax increases are needed and the policies that should be implemented to do so. Accordingly, it is likely that the policy components of the infrastructure plan, including any changes in tax law, may change during the legislative process.