American Families Plan Tax Changes

President Biden’s American Families Plan tax changes has a substantial impact on high-income taxpayers. What are the odds that the bill will be passed into law? Since the Senate is evenly divided at 50/50 for each party the Democrats will need all 50 votes from their side and the support of the vice president to pass the bill through budget reconciliation.

What impact will the American Families Plan have on tax rates?

Will it pass with enough time to respond before it takes effect on January 1st?

We do not know yet. The bill will be voted on and subsequently passed or not between October 1st and the end of 2021. There will likely be attempts for negotiation between the parties to attempt gain support from Republicans, and this will take some time.

Will Income Tax Rates Be Raised?

The top tax bracket will go up from 37% to 39.6% and the income level at which someone applies for the top bracket will be lowered from $628,300 to $509,300. This will raise taxes by a slim margin for certain high-income tax-payers.

Will the deduction for state taxes be reinstated?

Yes, it will. The bill includes the provision and will repeal the Trump administration’s law that put a $10,000 cap on the deduction.

Will itemized deductions be capped?

Most likely yes. President Biden previously proposed a 28% cap on benefits from itemized deductions. This could affect the tax benefit of charitable donations.

There has also been a proposal to eliminate deductions from 401(K) contributions and creating a tax credit for it instead. Earners in the 20% brackets and above would have to avoid contributing to a traditional 401(k), while earners below the 20% brackets would have to avoid the Roth 401(k) to grab the credit instead.

Will capital gains tax be raised?

Capital gains tax rates most likely will be raised.

Will the higher capital-gains taxes be retroactive to April 2021 as President Biden has proposed?

President Biden’s goal is to raise capital gains tax to the rate of ordinary income and create a top capital-gains bracket of 43.4%. The capital gains tax has not been at the same rate as ordinary income since 1923. The passed increase will likely be less extreme, perhaps to 25% or 28%. The 3.8% net investment tax will apply to owners of pass-through businesses with greater than $400,000 adjusted gross income.

Will the capital gains reset to fair market value at death—known as the “step-up basis”—be eliminated?

No, most likely not. The impact of this change would largely impact upper-middle-class families, which is not the goal of the bill and will likely be debated at a later date.

Will Estate Taxes Be Raised?

Almost certainly. Even if the tax rate was left at the current 40% level estate taxes will be higher due to lowering the $11.7 million estate tax exemption. The new exemption cap will likely be between $3.5 million and $5 million, up from President Biden’s proposal of a $1 million cap.

In a recent report to Congress, the IRS reported having a backlog of 35 million tax returns. This comes as a substantial increase from the 7 million of a few years ago. This backlog comes with a backup in customer service calls as well.

If you would like to know more about the American Families Plan tax rate implications, or have any other questions, please contact us today!