On April 28th, the White House announced the American Families Plan, which outlines President Biden’s plan for strengthening the economy and investing in families. The plan includes $1.8 trillion in investments and tax credits for families and children in the US over ten years. The American Families Plan aims to ensure that the wealthiest families pay their share in taxes, and that those making $400,000 a year or less do not see an increase in taxes.
There are a multitude of tax implications to note from the American Families Plan, including the increased top tax rate, closed loopholes, and changes in capital gains taxes. Knowing how the American Families Plan will affect you and your family can help you determine the best plan for the future of your estate.
Increasing the Top Tax Rate
In 2017, the top tax rate was cut from 39.6 to 37 percent. President Biden’s plan will restore the top tax rate to 39.6 percent, which will apply only to the top one percent of earners in the US. This restoration will ensure that all Americans are playing by the same rules when it comes to taxes.
Closing Tax Loopholes
The American Families Plan also eliminates the stepped-up basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) unless the property is donated to charity. This closes what many saw as a “loophole” in the system that exacerbated cross-generational inequality, allowing Americans to escape taxes by passing wealth down to heirs. The plan includes an exclusion for family-owned businesses and farms that are given to heirs who will continue to run the business.
Currently, high-income individuals usually pay a 3.8 percent Medicare tax on earnings, but loopholes in the law make the application of this tax inconsistent. Biden’s plan would apply this 3.8 percent tax to all individuals earning over $400,000 so that all high-income Americans are paying the same Medicare taxes.
The American Families Plan proposes the taxing of the capital gains of millionaires at regular income tax rates. This would mean a combined top tax rate on capital gains of 43.4 percent, compared to today’s 23.8 percent.
Another major tax change would be the taxing of unrealized gains at death over $1 million for single and $2 million for joint filers. This also includes the current capital gains exclusion of $250,000 for single and $500,000 for joint primary residences.
American Families Plan and Estate Planning
Changes in tax policies can significantly impact your estate plan, so knowing how these changes will affect you is important. An experienced DC trusts and estates attorney can walk you through the recent changes to tax laws and explain any necessary steps that should be taken to protect your estate.