May 10, 2021
In March, President Biden signed into law the American Families Plan. His hopes are to grow the middle class, expand the benefits of economic growth to all Americans, and leave the United States more competitive. These ambitious spending plans will come at a cost of $1.8 trillion in new federal spending on education and family programs. Furthermore, in Biden’s eyes, the best way to fund these programs and tax perks, is by increasing taxes on the wealthy. Upon closer examination, these tax increases will have impacts far more reaching than the wealthy.
Draft tax bills were proposed in March. Floating out there now is the HR2286, the Sensible Taxation and Equity Promotion Act (STEP Act), the Ultra-Millionaire Tax Act and the For the 99.5% Act.
Key takeaways from these proposals are to:
- Raise the top marginal income tax rate from 37 percent to 39.6 percent, which would apply to income over $452,700 for single and head of household filers and $509,300 for joint filers. However, these higher taxes could hurt the creation of new business and returns on private investment, which are a major source of funding for new drug discoveries and technology innovation.
- Tax long-term capital gains as ordinary income for taxpayers with taxable income above $1 million, resulting in a top marginal rate of 43.4 percent when including the new top marginal rate of 39.6 percent and the 3.8 percent Net Investment Income Tax (NIIT). This could result in many Americans simply postponing the sale of stocks and other investments.
- Tax unrealized gains at death for unrealized gains above $1 million ($2 million for joint filers, plus current law capital gains exclusion of $250,000/$500,000 for primary residences).
- Elimination of a “stepped-up” basis when a person inherits a capital asset. This is where the asset’s basis is increased to the property’s fair market value at the date of the previous owner’s death. Then, if the person who inherits the property sells it immediately, there won’t be any capital gains tax. Biden’s administration claims taxes on inherited family farms and small businesses won’t go up as long as heirs continue to run the farm or business. In reality, heirs may not want to continue to operate and are forced to sell to cover taxes.
- Apply the 3.8 percent NIIT to active pass-through business with income above $400,000, end the preferred treatment of carried interest, and make permanent the 2017 tax law’s limitation on excess losses that applies to non-corporate income. Also, capping 1031 Like-Kind Exchanges at $500,000 in deferred capital gains. The majority of 1031 exchanges are done by those in sole proprietorships or S corporations. The proposed 1031 exchange limit would then trickle down to small businesses renting. Consequently, landlords will inevitably charge more rent to absorb the extra taxes.
- Raise the corporate tax rate from 21% to 28%. This will be passed on to customers by raising prices and to workers by slowing wage growth.
- $80 billion over a decade to beef up the Internal Revenue Service (IRS) to increase tax compliance and collections.
Tax Foundation General Equilibrium models suggest that the American Families Plan Tax Provisions will reduce Gross Domestic Product, Gross National Product, Capital Stock, the Wage Rate and Full-Time Equivalent Jobs.
Gross Domestic Product is the product of Labor force growth + Productivity. According to the Census Bureau, U.S. population growth is the lowest since 1930’s. And, we now have the lowest birthrate since 1979. All that leaves us with is our ability to increase the output per worker (productivity).
The proposals have a long way to go before becoming law, but it is important to begin the planning process and to be aware of the far-reaching ramifications if enacted. The cost of these taxes will certainly extend beyond the wealthy.
Jenifer Pento, CPA
Tax and Accounting Advisor
Pento Portfolio Strategies
O (732) 772-9500
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