How President Biden’s Tax Proposals Would Affect Individuals

By Dannell R. Lyne  |  July 28, 2021

How President Biden’s Tax Proposals Would Affect Individuals

One of the promises made by President Joe Biden last year on the campaign trail was to increase taxes for corporations and wealthy individuals. On April 28, 2021, the Biden administration announced the proposed American Families Plan, designed to create new education and family programs to strengthen the country’s economic future. To pay for the plan, the administration outlined several tax law changes, including numerous proposals to raise taxes on high-income taxpayers, while at the same time providing additional tax credits to low- and moderate-income families.

Below are several of the key proposed changes Biden is hoping to get passed by Congress.

  • Raise the top individual income tax rate for taxable income from 37% under current law to the former level of 39.6%. (The top individual tax rate was reduced to 37% by the Tax Cuts and Jobs Act [TCJA] of 2017.) This would apply to income over $452,700 for single and head-of-household filers and $509,300 for joint filers. The administration has stated those with incomes under $400,000 will not be subjected to an increase in their taxes. This leads to the possibility that changes to the size of the 39.6% tax bracket or other brackets down to the $400,000 level could be made.

  • Tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million. Taking into consideration the 3.8% Net Investment Income Tax, individuals making over $1 million would have a top marginal rate of 43.4%. In addition, the administration has indicated it would like to retroactively apply this tax increase to the date of this announcement.

  • Eliminate the step-up in basis for capital gains taxation, which would tax unrealized gains at death for those unrealized gains that are above $1 million ($2 million for joint filers). This would close the existing loophole that allows families to pass capital gains tax-free to their heirs. The effect of these steps would potentially subject those gains to both an income tax and an estate tax at death. They also would eliminate the tracking of carryover basis when passing assets from one generation to the next.

  • Eliminate capital gains treatment completely. Owners of private equity funds and hedge funds have long had a perceived advantage of being able to obtain capital gains treatment for their management of the funds. The TCJA increased the holding period for capital gains treatment from greater than one year to greater than three years. With the capital gains tax rate and ordinary income tax rate being proposed to be the same for those earning over $1 million, this change would primarily affect only those earning less than $1 million and more than $400,000.

  • Cap the tax benefit of itemized deductions to 28% of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28% would face limited itemized deductions.

  • Restore the Pease limitation on itemized deductions for taxable incomes above $400,000. Before suspension under the TCJA, the total amount of otherwise allowable itemized deductions was limited for certain high-income taxpayers. The limitation applied to all itemized deductions except medical expenses, investment interest, casualty, theft or wagering losses, and certain qualified charitable contributions. The allowable itemized deductions were reduced by 3% of the amount that the adjusted gross income was over the threshold amount but couldn’t reduce it by more than 80%. It remains to be seen how the restoration of the Pease limitation and the cap mentioned in the previous bullet will work in tandem.

  • The TCJA ended like-kind exchanges for personal property but retained it for real property. The American Families Plan proposes to also end like-kind exchange deferral for gain on real property more than $500,000. A like-kind exchange transaction is a swap of property, business or investment, for another that defers capital gains tax. This also creates issues of taxing gain when there may be no realization event providing liquid funds to pay the taxes.

  • Phase out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.

  • Provide renewable-energy-related tax credits to individuals.

  • Expand the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increase the maximum reimbursement rate from 35% to 50%.

  • For 2021 and if economic conditions require, increase the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15% phase-in rate.

  • Reestablish the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.

  • Create a second threshold of payroll taxes, in which the Social Security portion of the payroll tax would be imposed on wages above $400,000. This would create a “hole” in application of payroll taxes where wages above the current law threshold and below $400,000 would not be subject to payroll taxes.

An item that is notably absent from the proposed changes is an increase or elimination of the cap on the state and local tax deduction. Lawmakers from high-tax states such as New York and California would like to see an elimination or partial rollback of the limitation, while others feel such a change is too costly and would only benefit higher income taxpayers.

It is unknown when exactly any of these proposals will be passed by Congress. If this does happen, it will be important to note whether some changes will be retroactive to 2021 or begin as of 2022. Based on the early months of the administration, President Biden and his team seem willing to work with all parties to come up with a plan everyone will deem fair and equitable. If you have any questions, please reach out to your Marks Paneth advisor.   

About Dannell R. Lyne

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Dannell R. Lyne, CPA, MST, is a Partner in the Private Client Services Group at Marks Paneth LLP. To this role, he brings extensive experience in tax planning and compliance for family owned businesses, nonprofit organizations, alternative investment funds and high-net-worth individuals – specifically executives in the financial services industry, investment partnerships and international matters. Prior to joining Marks Paneth, Mr. Lyne was a Partner with Dylewsky, Goldberg & Brenner, LLC – a Connecticut-based, full service... READ MORE +

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