This article was last updated on May 2
President Biden has released his next major spending plan, dubbed the American Jobs Plan (AJP), which includes trillions of additional dollars in spending on infrastructure, job creation initiatives and support for middle class families and lower income earners. However to pay for the massive spending proposals the administration has proposed raising tax rates for the richest Americans. There would also be an increase in corporate tax rates to 28% (from 21% today) under what is being called the “Made In America” Corporate Tax Plan, which would aim to fund the spending programs over 15 years.
Here is a summary of the Biden Tax Proposals:
Under the Bush Tax Cuts and subsequent Trump Tax Plan in 2017 the top marginal tax rate was cut for high-income individuals and families. Under the Biden Plan the proposal is to revert the top marginal tax rate to it’s pre-2017 level of 39.6%. for income thresholds over $400,000 (you can see current 2021 and past tax brackets here). There is also another hit for tax payers above this income level through the limitation of tax benefit of itemized deductions to 28% of value for those earning over $400,000 (essentially restoring the Pease limitation)
Creates a social security payroll tax “donut hole”. Currently there is a 12.4% Social Security payroll tax on income earned above $400,000, evenly split between employers and employees. Under the Biden proposal, Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 would not be not taxed.
The Biden proposal will also take aim at those earning over $400,000 who deduct qualified business income (under Section 199A) thereby reducing their overall tax bill. This will hit those with rental properties or other deductions taken by having a side business in addition to regular business income.
Another tax hike would result in a doubling of the long-term capital gains rate for those earning over $1 million to 39.6%, or essentially taxing gains at the highest marginal tax rate. This is in addition to a 3.8% tax on investment income, for households making more than $1 million. When you add state tax on capital gains in places like California and New York, some high earners could end up paying over 55% in taxes on these gains! In addition, qualified dividends for those with adjustable gross incomes (AGI) above $1 million would also be taxed at the ordinary income tax rate.
The estate tax exemptions enacted under the Trump tax cuts would also be rolled back including the “step-up in basis” for gains in excess of $1 million. The Step-up basis allows capital gains to be based on the time of death/hand-over of assets to heirs, versus the actual cost at the time of purchase. The proposal also expands the estate and gift tax by restoring the rate and exemption to 2009 levels ($3.5M exemption & 45% tax rate).
Further, ultra rich hedge-fund partners would lose their carried interest loop hole, which allows them to pay taxes on their gains at lower rates than they would under standard marginal tax rates.
To try and claw back years of unpaid taxes due to resource constraints the Biden plan would provide billions of dollars in extra funding for high net worth individuals audit enforcement and system upgrades for the IRS. This should also help lower income earners and speed up tax refund processing.
All of the above are still proposals and need to get passed in Congress once a formal bill is introduced, which will require a lot of negotiations and compromise within and across party lines. I will update the article as more information comes to hand and you can stay connected via the options below to get the latest updates.