The Tax Implications of Biden’s New Proposals

President Biden recently unveiled sweeping proposals that are getting much attention from politicians and working Americans alike. Together, the American Families Plan and American Jobs Plan would devote over $4 trillion to overhauling infrastructure, expanding affordable childcare, upping paid family and medical leave, and offering some level of free college, among other things. Funding for these proposed plans would rely largely on tax hikes for corporations and the wealthy, but there are also some popular tax credits baked in.

Whether these proposals receive bipartisan support remains to be seen. To get them signed into law, both the House and Senate would need to pass bills that outline the details. In the meantime, let’s unpack how these proposals could affect different households.

What’s Included in the American Families Plan and American Jobs Plan?

The American Families Plan would earmark $1.8 trillion for several different initiatives. Childcare is a main centerpiece. If the proposal were to pass as is, it would provide free, universal pre-K and reduce childcare expenses for children under 5. This on its own could save families about $15,000 annually, according to the White House. The proposal would also build out a national paid family and medical leave program to help those who are caring for a new baby or sick loved one. Another big component of the proposal is providing two years of community college at no cost to students.

The American Jobs Plan is a separate $2.3 trillion proposal that would direct a large chunk of funds to breathing new life into the country’s infrastructure. This includes the revitalization of bridges, roadways, rail lines, airports, and even Internet broadband. The plan would also devote billions to upgrading drinking water systems, updating affordable housing, funding manufacturing, and fostering workforce development, among other initiatives.

How Would These Proposals Be Funded?

The big question ultimately comes down to funding, though it should be noted that these proposals certainly aren’t set in stone. There’s still a long way to go in terms of negotiations and approval. With that said, to pay for these proposals as is, President Biden would rely a great deal on a combination of tax increases. This would translate to:

• An income tax hike for the wealthy: The top individual tax rate would increase from 37 percent to 39.6 percent (reversing the rate back to what it was prior to the 2017 Tax Cuts and Jobs Act). President Biden continues to assure that Americans earning less than $400,000 will not see their taxes go up. High-net-worth individuals and couples, however, will have to brace for a 2.6 percent income tax hike if the proposal passes as is.
• An increase in capital gains tax: When it comes to long-term capital gains, asset appreciation is taxed at a lower rate when compared to ordinary income. For individuals whose earnings exceed $1 million, the tax on capital gains and qualified dividends would rise from a maximum of 20 percent to 39.6 percent under the new plan. That’s on top of the 3.8 percent surtax that applies to net investment income. When taken together, along with the increase in the top individual tax rate, America’s wealthiest would experience a significant change in their tax liability.
• Changes to inherited assets: When someone dies and they leave assets like stocks to their heirs, they’re inherited at whatever their current market value is. In other words, gains that have occurred since the original purchase are untaxed. The American Families Plan would trigger a tax liability for gains that are more than $1 million at the time of death. If passed, it’s something that would affect the way top-earners approach their wealth management strategies and estate planning.
• A bump in the corporate tax rate: The federal corporate tax rate would jump from 21 percent to 28 percent. It’s worth noting that this is less than it was prior to the Tax Cuts and Jobs Act of 2017, which brought it down from 35 percent. Still, U.S.-based corporations would have to prepare for the increase. This might be a challenge for small to medium-sized businesses that are structured as C corporations, as it could disrupt their ability to function or contribute to net job growth, according to the Tax Foundation. However, this would not affect businesses set up as S corporations or partnerships.

In addition to the above, President Biden is also proposing a number of other tax measures to incentivize companies to do more of their work domestically, as opposed to overseas.

What Tax Credits Would Be Included?

On the other side of tax increases would be a variety of tax credits and other advantages for many working Americans. The American Families Plan calls to extend several important tax benefits that were at the center of the American Rescue Plan of 2021. This includes:

• Keeping the expansion of the child tax credit, which increased from $2,000 per child to $3,000 for many families. For kids under 6, that number went up to $3,600. Instead of waiting until tax season to claim the credit, it has also allowed folks to collect it via monthly payments.
• Maintaining the expansion of the Earned Income Tax Credit (EITC), which went up almost three-fold since the American Rescue Plan took effect. This refundable tax credit largely benefits low- to moderate-income households.
• Making permanent the subsidies that help folks pay for health insurance through the Affordable Care Act. This makes health care more affordable by lowering premiums for those who go through the health insurance marketplace. The White House predicts that it will give millions of uninsured people access to affordable health insurance.
• Permanently maintaining the expansion of the Child and Dependent Care Tax Credit, which provides families earning less than $125,000 with a tax credit equal to 50 percent of their qualified childcare spending for kids under 13. Families making between $125,000 and $400,000 receive a partial credit.

In Other Tax News…

While legislators are still ironing out the details of the American Families Plan and American Jobs Plan, and nothing has been signed into law yet, New York state has passed its 2021-2022 budget—and it could have a big impact on New Yorkers. The Tax Cuts and Jobs Act of 2017 put a cap on the deduction for state and local taxes (SALT). This included property taxes, limiting the deduction to $10,000. Hit hardest by this have been folks living in high-tax states, like New York.

The newly passed budget will provide a workaround of sorts, allowing for something called a Pass-Through Entity Tax. This will essentially enable the owners of eligible S corporations and partnerships to deduct state income taxes through their businesses. This, in turn, can help them avoid that $10,000 SALT deduction cap, which is good news for many New York-based business owners.

While President Biden’s new tax proposals could have a direct effect on your financial life, it’s important to remember that at this point, they’re just that—proposals. We have yet to see concrete legislation, and it’s likely that the final version will be a watered-down form of what’s been proposed. Investors hoping to make changes to their portfolios would be wise to wait until we have more clarity before moving forward. In the meantime, you can contact your Opal advisor today to talk through the ways your unique financial situation might be impacted.