The American Families Plan, introduced in late April by President Biden, prioritizes education, childcare and paid leave for workers. It is expected that this plan will evolve and change over time, but here are some of the tax changes currently being proposed.
- One major tax relief proposal is to extend the expanded child tax credit that was first enacted in the American Rescue Plan Act (ARPA), through 2025. The ARPA increased the $2,000-per-child credit to $3000 ($3600 for children under the age of six). Children 17 years old and younger qualify, the credit is fully refundable and the IRS is expected to begin paying half of the credit to qualifying families monthly from July to December. Currently, the expansions apply only for 2021.
- Proposed tax hikes are expected to fund the programs in the American Families Plan.
- Raise the income tax rate from 37% to 39.6% on wealthy individuals earning incomes more than $452,700 ($509,300 for joint filers).
- Long-term capital gains tax on millionaires would increase from 20% to 39.6% with an added 3.8% surtax on net investment income, making the rate 43.4%. The tax increase will affect taxpayers reporting at least $1 million in income.
- Increased tax on inherited assets upon death. Unrealized gains in assets owned by an individual would be subject to federal income tax upon death. However, there are some exceptions: Gains totaling less than $1 million ($2 million for a couple), property donated to charity, and family-owned businesses and farms (if ran by heirs). If you have a capital gain from the sale of your main home, the existing $250,000 (or $500,000 for joint returns) exclusion is expected to remain. It’s not clear how transfers to spouses or trusts will be treated.
- Cap the deferral from like-kind exchanges of real property at $500,000.
- Expand the 3.8% surtax on investment income to cover other types of income. This proposed change will give more money to the IRS for audits of wealthy individuals, large corporations, pass-throughs and others. Additionally, it will require financial institutions to report more information to the IRS.
One tax deduction not currently addressed in the American Families Plan is lifting the cap on the State and Local Tax (SALT) deduction for 2021. In 2017, the tax reform law capped the deduction for SALT claimed on Schedule A at $10,000.
However, the SALT deductions are a priority for some legislators in Congress, and lawmakers from high-tax states, have pushed to repeal this limit. It’s expected that Biden Administration officials will address the SALT cap in the future.