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The Top Five Most Impactful Tax Considerations in the American Families Plan

White House, Washington, DC

During a recent joint session of Congress on April 28, 2021, President Biden unveiled the framework for his American Families Plan, an ambitious $1.8 trillion proposal designed to provide economic security for many middle-class Americans while investing in education, healthcare and childcare for families.

A major component of the proposal includes a tax reform agenda that focuses on reversing many tax laws enacted by the 2017 Tax Cuts and Jobs Act, including $800 billion in tax cuts and $1.5 billion in new taxes over the next ten years.

For many Americans, the tax provisions outlined in the proposal mean tax cuts. For high income Americans, the proposal paints a difference picture. Here are the top five proposed impactful tax considerations of the American Families Plan:

Increased Top Tax Rate

Top tax rate would increase from 37.0% to 39.6%.

Medicare Tax

Potential expansion of 3.8% Medicare tax on those making over $400,000, therefore making the top effective tax rate 43.4%.

Capital Gains

Capital gains rates would be eliminated for taxpayers with income greater than $1M. Current rates for long-term capital gains are 20.0% regardless of total income. This potential elimination of preferred rates would effectively double taxes on long-term capital gains.

Like-Kind Exchanges

Elimination of deferral of gains related to like-kind exchanges (1031 transactions), with gains calculated over $500,000. This will have significant impact on the real estate industry.

Estate Planning

Taxation of unrealized gains in excess of $1M at the date of death of a taxpayer. Certain exceptions are noted to apply, including farms and family-owned businesses where the business transfers to their heirs who will continue to run the business.

At this time, the American Families Plan exists only as a proposal. As there are no formal legislative actions or bills in progress, accounting professionals still have many questions:

  • Will capital gains be taxed at ordinary rates if all income is over $1 million or just those capital gains in excess of $1 million?
  • Will there be an elimination of the $10,000 state and local tax ceiling for itemized deduction?
  • What determines a “family-owned business”? Is this a certain percentage of family members who will own & “run” the business?
  • Will limitations on overall itemized deductions for high-income earners (PEASE limitation) be reinstated?
  • If and when might this proposal be signed into law and when would the effective date of law take place?

As with most legislative processes, the plan may take many shapes before it is signed into law. We will continue to monitor developments and provide updates.

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