Heirs and hedge fund managers might take a hit, but tens of millions of families and lower-paid young singles will come out ahead with fatter tax credits.
President Biden will lay out his $1.8 trillion American Families Plan on Wednesday in his first address to a joint session of Congress on the eve of his 100th day in office. The plan is focused on expanding benefits for education, children and childcare and the administration intends to finance it in large part with tax hikes on the wealthiest individual taxpayers. It’s the follow-up to his American Jobs Plan, which focused primarily on physical infrastructure like roads and bridges and would be financed with corporate tax hikes.
Here’s who stands to lose out from the individual tax changes Biden is proposing—and who might come out ahead.
The bulk of Biden’s tax proposals are targeted at the wealthiest Americans. He wants to increase the top individual income tax rate on ordinary income from 37% to 39.6%—the level it was prior to former President Trump’s tax cuts. This year, that top tax rate kicks in at $523,601 in taxable income for singles and $628,301 for married couples filing jointly.
According to an analysis of Biden’s campaign tax proposals by the Tax Policy Center, restoring top income and payroll tax rates to pre-2017 levels would raise more than $111 billion over the next decade.
Heirs of larger estates
Biden has proposed eliminating the “step-up” in basis on assets in an estate—this is the loophole that allows heirs to avoid capital gains tax on an unlimited amount of previous untaxed appreciation in assets they inherit. The Biden plan would allow the first $1 million in passed-on gains from each person who dies to remain tax free—and the administration points out that a couple could pass on $2.5 million in gains to their heirs untaxed, once the $250,000 per person exclusion on gains from the sale of a primary residence is factored in.
For households earning more than $1 million, Biden is proposing taxing long term capital gains and dividends at his higher top ordinary income tax rate of 39.6%—nearly double the current top 20% tax rate on such income. When combined with a 3.8% surtax on investment gains implemented as part of the Affordable Care Act, Biden’s plan means that the top federal tax rate for the highest earners would rise from 23.8% to 43.4%.
The Biden Administration has consistently emphasized that its proposed capital gains tax changes will only impact a tiny fraction of American households. “This change will only apply to three-tenths of one percent of taxpayers…about 500,000 households,” National Economic Council director Brian Deese told reporters earlier this week.
Hedge fund bigwigs
Biden wants to do away with the carried interest tax break—a loophole in the tax code that allows hedge fund partners to treat a large portion of their compensation as long term capital gains and therefore pay a much lower tax rate on what they earn than they would if their compensation were taxed as ordinary income.
“The President is also calling on Congress to close the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income just like every other worker,” the White House said in a fact sheet about Biden’s plan.
High-earning real estate investors
Biden’s plan calls for ending a popular tax break connected with 1031 like-kind exchanges that lets real estate investors defer federal capital gains taxes on a property by exchanging it for a different one. But it would end this break only for gains greater than half a million dollars.
Wealthy real estate investors would also get hit by Biden’s plan to end the “step-up” in basis loophole, which, when combined with the 1031 exchange tax break, can allow a family to permanently avoid capital gains taxes on property passed down to heirs.
Rich tax dodgers
As part of the American Families Plan, the Biden Administration wants to send an extra $80 billion to the IRS over the next ten years, on top of the 10.4% increase it has proposed for fiscal year 2022. That money is intended to help the agency bulk up its enforcement efforts with more audits (not to mention skilled auditors) for high earners, big companies and large estates, and the addition of a new requirement that financial institutions report annually on money flowing into and out of accounts, which is designed to help the IRS better target its audits.
Biden wants to make it much more difficult for businesses and the ultra-wealthy to hide wealth from the IRS—something they do at much higher rates than average salaried workers. A recent study published by the National Bureau of Economic Research found that the top 1% of earners failed to pay taxes on 20% of their income. Meanwhile, audit rates on ultra-high earners and corporations have fallen dramatically.
The White House estimates that the extra support for the struggling agency will raise $700 billion for the federal government over the next decade.
Taxpayers earnings less than $400,000 per year
Biden has consistently promised that Americans earning less than $400,000 per year will not see higher tax bills. And taxpayers at the lower end of the income spectrum are also likely to benefit from extensions of many of the expanded tax credits included in the American Rescue Plan from March, funded by the tax new hikes on the wealthy. More on that below.
Low- and middle-income families with kids
Biden’s plan includes a 5-year extension of the expanded Child Tax Credit authorized by the $1.9 trillion American Rescue Plan, which starting in July will provide parents who qualify with a $3,000 credit for every child aged 6 to 17 and $3,600 for every child under age 6, paid out on a monthly basis through December with the remainder to be claimed on 2021 tax returns next year. Individuals earning up to $75,000 per year, heads of household earning up to $112,500 per year and joint filers earning up to $150,000 per year are eligible for the full expanded credit.
The American Families Plan would also make the existing $2,000-per-child tax credit permanently refundable, meaning it would be more accessible to families on the lowest end of the income spectrum who previously did not pay enough taxes to qualify for the maximum credit. Some Democrats have pushed to make the expanded credit permanent too.
Low-income individuals without kids
The plan also includes a permanent expansion of the Earned Income Tax Credit, which was also included in the American Rescue Plan. The changes to that credit were designed to bulk up benefits for low- and middle-income filers without children. The ARP nearly tripled the size of the maximum benefit for childless filers from $534 to $1,502. It also widened the eligibility criteria for the credit to include people under age 25 and people over age 65.
The White House estimated the expanded credit will benefit 17 million workers this year.
Biden also wants Congress to make permanent the American Rescue Plan’s temporary expansion of the Child and Dependent Care Tax Credit, which would give eligible families a tax credit of up to $4,000 for one child or up to $8,000 for more than one child to offset spending on childcare—including after-school programs and summer day camp—while they work. The amount of that credit phases out as income rises above $125,000.
Those who receive their health insurance through the Affordable Care Act could also see some tax benefits, depending on how Democrats in Congress interpret the White House’s proposal. Biden’s plan calls for extending the expanded tax credits for ACA premiums that were included in the last stimulus bill, but it does not provide many details.
Under the American Rescue Plan, eligibility for tax credits to health offset the cost of health insurance premiums was expanded to people with higher incomes.
Salaried workers and other law-abiding taxpayers
Most taxes due on wages are paid largely because they are withheld automatically and the earnings of workers are fully reported to the IRS. “While roughly 99% of the taxes due on wages are remitted to the Internal Revenue Service, compliance across other forms of income is substantially less,” the Treasury Department said Wednesday.
People with more complicated financial lives, more wealth and more sources of income have more opportunities to engage in aggressive and questionable tax planning. Unsurprisingly, their compliance with tax law is lower. The White House is hoping to force rich tax dodgers to pay more of what they owe.